Businesses around the globe are experiencing the effects of the highest inflation rate in a generation.

The surge in inflation is impacting asset and business interruption values across all industries. In light of this, businesses are reminded to review their insured values and their policy wordings to confirm that their insurance programmes are still adequate.

In this environment, it is more important than ever to be mindful of the risks of underinsurance.

There have been significant rises in the cost of reinstating property. Added to this, the cost of labour and logistical services is also fast increasing.

Underinsurance may impede business recovery by capping claims payments below the actual value of lost assets.

Risk of underinsurance

Underinsurance occurs when the declared values of assets (like property, building, and contents) and exposures fall below actual values. It has consequences for policy loss limits, applications of underinsurance restrictions, and adequacy of business interruption coverage.

In the event of underinsurance, the insurer will proportionately reduce the amount that they are obliged to pay based on the difference between the insured value and the actual value of the lost asset.

If the value of insured assets increases but the relevant loss limits are not appropriately increased, then in the case of a significant underinsurance and a total loss, a business may not have full indemnity if the eventual loss exceeds the policy loss limit.

Given global labour and supplies shortages, delays in shipments, and the potential for protracted construction projects, the length of business interruption indemnity periods should be reviewed and, if necessary, extended.

The implications of inflation vary by industry, geography, and even by unique business.

Inflation is not unprecedented, and there are coverage strategies that can protect businesses through this period of volatility. Businesses should review limits in their property and business interruption programmes.

If you have any questions please speak to one of the team today on 020 3907 7866 who will be delighted to help.