The cost of underinsurance

Underinsurance. It’s perhaps one of the aspects of insurance that is least understood. It’s also an aspect that can cause very real, but very avoidable, problems in the event of a claim.

Before the covid pandemic caused the country to lockdown during the first half of 2020, it was thought that around 40% of UK businesses had inadequate levels of insurance and 80% of commercial properties in the UK were also thought to be underinsured.

With an RSA report suggesting that one in four SMEs said that they would have to close if they had an unexpected £50,000 bill, having adequate insurance to cover a claim is vital. That said, with over a quarter of UK businesses forced to close during the first lockdown, cutting costs has, for many, been the difference between closures being a temporary pause or being permanently out of business.

Executive Chair, Tim Ryan, shines a light on underinsurance for our customers as a part of our focus on this topic over the coming quarter. 

What is underinsurance?

Whether for your property, fixtures and fittings, stock, business interruption, legal liabilities or any other aspect of your business, your insurance policy should ideally cover risks to those aspects enough to allow the policyholder to put themselves back into business in the event of a claim.

Underinsurance happens when that business (or an individual) fails to insure for a sufficient amount. Businesses can find themselves underinsured for a number of reasons, whether this is by accident or on purpose.

When the assets in your business are underinsured, the ‘average’ clause is likely to come into play. This clause requires you to bear a proportion of the loss if your assets were insured for less than their full reinstatement (repair or replacement) value.

So, if you are a business with a piece of plant that would cost £5,000 to replace, but you have requested cover for only £3,000, in the event of a claim, average will be applied and your insurance company is likely to pay out only £3,000. Leaving you to pick up the remaining £2,000. This rule also applies to partial losses.

Likewise, you may be a business with multiple risks, but you decide not to cover one of those to try to keep your insurance premiums lower. In the event of a claim, though, this can be catastrophic.

For retail businesses, perhaps the most prevalent time for underinsurance is during high buying seasons, such as Christmas, when raising sums insured with a seasonal increase for stock and contents will most likely be required. Keeping your insurance broker in the know about value of stock, as well as any changes to your business assets, is essential.

The dangers of being underinsured are clear and, in the event of a claim, an underinsured business could suffer a loss that is too large to bear, causing it to have to cease trading.

How to avoid being underinsured

Neither brokers nor insurers are keen to see their policyholders out of pocket, and we’re in the business of helping to protect our customers’ interests. With that in mind, we are on hand to help guide our customers through calculating sums insured, making sure the right insurance is in place and that it is as comprehensive as possible.

It’s in these areas that the true value of working with insurance brokers comes to the fore, offering the experience and market knowledge to find both the policies and the sums insured needed to properly cover your business assets and revenue. All ensuring you are able to rebuild your business properly in the event of a claim.

Helping to focus on underinsurance

At UNA Alliance, we're focusing on underinsurance, to research its prevalence and to highlight its risks. Watch this space...