1 October 2020

Avoiding Underinsurance

By Kelly Oates
Underinsurance can be debilitating to businesses and individuals trying to get back on their feet following a loss, but often underinsurance doesn’t come to light until a claim has already been submitted.
What is underinsurance?

If the sum insured or limit of indemnity on a policy does not represent your current value of items or amount of exposure then you are underinsured, which will impact the amount you are paid in the event of a claim.

If you’re not sure how to work out the amount cover you need then speak to your broker, who will be able to recommend how to calculate this to ensure you are fully protected.

What happens if I’m underinsured?

If your sum insured is not enough to cover the full value of the items insured, the amount of any claim payment will be reduced in the same proportion. This is referred to as an ‘average clause’.

For example:

  • The sum insured for contents on your policy is £50,000
  • The actual value of contents at your premises is £100,000
  • You submit a claim for contents in the amount of £10,000

The actual amount paid would be 50% of the total claim as the sum insured only represents 50% of the value at risk and therefore the settlement amount would be only £5,000.

Which areas can I be underinsured in?

The most common areas we see are:

Equipment and Contents – items such as your own technical equipment, computers, laptops and office contents should be insured for their new replacement value, rather than the amount you paid for them.

Buildings – your buildings should be insured for the rebuild cost, rather than the market value. If you have recently bought your property, then the rebuild cost can be found on your deeds or mortgage valuation.

Business Interruption – many business interruption policies have a standard 12-month indemnity period, which may be too short of a length of time to get your business up-and-running again following a major loss. This article from Aston Lark, our parent company, provides more information on business interruption indemnity periods.  The figure for your gross revenue may also be out of date, for example if there has been growth in your business and turnover.

What can I do to avoid underinsuring my business?

We would recommend keeping an up-to-date itemised list of your equipment and contents, as well as keeping us updated with any changes, or projected changes, in your company’s turnover and revenue figures.

We are here to help if you have any questions or advice – contact the Performance team on 0208 256 4930.