Feature
Business Protection The dangers of being
Nick Ellson, branch sales director of Lorica Insurance Brokers, explores the risks a business can face by being underinsured
Many businesses are risking their own survival by unwittingly remaining underinsured. The problem is widespread and perennial – an event could strike at any moment, leaving businesses vulnerable to severe financial loss that could in some instances lead to failure and insolvency. A 2012 survey from the Building Cost Information Service found that 80
per cent of commercial properties in the UK were underinsured. A further 2014 survey of small and medium sized businesses found that about 62 per cent of respondents were underinsured due to a lack of business interruption insurance or because they were not aware if this type of cover was included within their business insurance. You may only find out that your business is underinsured when you
experience a major loss event and need to make a claim. That could be too late and for many could mean the end of the line.
What does it mean to be underinsured? If your business is underinsured, it means that your assets are valued and insured at less than their true value, leaving your business inadequately protected. In the event of a loss you could be compensated for much less than the true value and a shortfall in your insurance payout could ruin your organisation. Businesses can be underinsured for many reasons. Often it is because business owners think that a major loss will never happen to them. In reality however, inclement weather or a destructive fire can impact and destroy any business.
What is the danger of being underinsured? Being underinsured threatens a business’ entire survival. A single loss event, no matter how trivial, can be disastrous if a business is underinsured and thus receives an insurance payout following the loss that is insufficient to return the business to its pre-loss position. An inaccurate asset sum insured is not your only threat however - an inadequate Gross Profit sum insured and corresponding indemnity period may cause insurance payments to stop before a business fully recovers after a loss. This could leave your business half-recovered and stagnant once the indemnity period on your insurance policy expires.
Which policies are most often underinsured? Any commercial policy can be underinsured, but insurers report that the following are the most commonly underinsured policies:
Buildings – business owners often only consider the market value of a building and ignore the actual cost of rebuilding. Failing to regularly reassess the value of your property and adjust your policy accordingly could lead to your business being underinsured and consequently unprepared for even the smallest losses.
Machinery and plant – a frequently updated list of all machinery and plant is the best way to ensure it will all be covered when making a claim. Remember that many policies are written on a reinstatement basis so values need to reflect replacement cost as new.
Business interruption – the inability to maintain business operations in the wake of a crisis can be devastating. Possessing a current and regularly tested continuity plan and the correct basis of cover is essential to your survival following a loss.
How can I avoid being underinsured? You can prevent your business from being underinsured by accomplishing the following: • Provide the cost of rebuilding the property to your insurance provider. We recommend obtaining a professional valuation every three years.
• Conduct regular, accurate valuations of your business and property. • Determine an appropriate indemnity period that allows your business enough time to recover.
• Review your policy wording to ensure you have the broadest cover possible.
• Increase your sum insured to reflect inflation.
Your business is your lifeblood, and you should do everything you can to protect it - this includes properly insuring it against any possible damage.
For more information email
nellson@loricainsurance.com or call 0333 400 0919
44 CHAMBERLINK May 2016
underinsured
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