4th March, 2016

Risk Perspectives

Under and overinsurance… check your level of cover is correct

Part of our role as risk advisers is to understand the types of cover a business requires and also whether the sums insured are accurate.  Quite simply, we want to make sure you are fully protected in the event of a claim. Approximately three quarters of commercial properties are underinsured, and there are also circumstances where too much insurance is in place (overinsured).  Both will have a detrimental effect on the business.

Whilst initially cost may be a factor in holding a lower than required sum insured, generally businesses underestimate the real cost of holding adequate insurance.

Take for example a prospective client of ours who had suffered damage to his roof during a storm in 2014.  In the claim investigation it was revealed that the claim would cost approximately £12,000, however, the property was underinsured by 25%.  As a result, the insurer only paid 75% of the loss (£9,000), meaning that the client had to fund the other £3,000. This was because the average clause had been applied.

Many clients would think that being overinsured would not create a problem. However, after a business was recently referred to us we discovered that the buildings sum insured was very high for the type and size of premises being covered.  When raised with the client he explained that he had been afraid of being underinsured so had deliberately inflated the amount of protection.  This would have resulted in higher premiums without the benefit of any extra cover, and we explained that a reasonably priced valuation could save them money in the long run.

Here are some things to consider when assessing whether you are over/underinsured:

  • Altered or extended the property since your last valuation, factoring in gates, fences and car parking.
  • Insurance cover based on the market value of the building instead of what it would cost to rebuild your property also known as “Reinstatement Cost Assessment” (RCA).
  • Your property is a listed building –  the time and cost of repairs/rebuilds are likely to be far greater than for an unlisted building, impacting your business interruption cover.
  • Recently become VAT registered – this could mean that you are underinsured by 20%!

In summary, our role is to bring about peace of mind by ensuring that the risks you are insured for, and the level of cover associated, are appropriate for your needs and that of your business.  Our assessment of claims shows that whether you are over or underinsured, the effects can be detrimental to the continuity of your business.  That’s why at DB Wood we start with you.