What is underinsurance?
Your premium is calculated based on your individual circumstances and the amount of cover you choose to take out to protect your organisation. Underinsurance occurs when you’ve not taken out the right amount of insurance cover for your needs.
There will be a variety of factors to take into account when you assess how much insurance you need. If you’re not sure about this you should get advice from a broker or valuation expert because if that amount is wrong, it’s likely to impact the amount you’re paid for any claim you need to make.
What does it mean if I am underinsured?
Taking out insufficient insurance cover will essentially mean any claim will be insufficiently covered.
For example, if the cost to rebuild or replace your property or contents is £100k but you have taken out insurance that will cover you for £50k, then you would effectively be underinsured by £50k or 50%. Any claim you make will only be paid on the basis of the amount of cover you chose, based on what is called the ‘average clause’ – so in this example your insurer would only cover 50% of any claim, no matter the size of that claim. This would leave you needing to pay the remaining costs yourself which could be anything from hundreds, to thousands, to millions of pounds.
How do I know if I’m underinsured?
Make sure you let your broker know about any changes to your organisation. Ask them to help you understand how you should assess whether your cover is sufficient for your needs and what professional help may be available.
Remember that some changes to your business might not just relate to contents or building insurance. If you have, for example, bought specialist equipment that takes time to replace, this will impact the amount of time it might take for you to get back on your feet after say, a flood. Therefore this might impact the amount of business interruption insurance you need.
What is business interruption insurance?
Business interruption insurance should be added to the overall business insurance policy, providing cover for loss of income and helping the organisation get back on its feet financially. Whilst property insurance would look after the resulting damage of, say, a major water leak, the impact of such an event might leave the organisation unable to complete day-to-day tasks. This is where business interruption steps in to cover loss in revenue.
Your business interruption insurance is based on an accurate assessment of the amount of time it would take for your organisation to recover from an event that impact your normal operations – this is called the indemnity period. Making sure you have calculated this correctly is key to protecting your business income and cash flow until the organisation is running as it was before any event occurred.
The recovery process often takes longer than you think – even small, straightforward organisations often need longer than 12 months’ protection. For example, planning permission can often take months before any rebuilding works can even start. If you need specialist equipment think about how quickly it can be sourced.