We hope you’ve had a good start to 2023. During the course of the year we are going to put the spotlight on areas of insurance we think could affect you or your business, starting with the risk of underinsurance.

You have probably seen your insurance premium increase at last renewal and this is largely due to index-linking of your existing declared values. The percentage of index-linking that is generally applied is based on recommendations by the Royal Institute of Chartered Surveyors, who supply these figures to insurers. Due to the ongoing economic climate and inflation rises and labour costs, many businesses and individuals are not prioritising the valuation and risk assessment aspect of their insurance, fearful that it may lead to higher premiums. As margins are squeezed, businesses are increasingly driven by price over quality of cover. The truth is, sadly, you only know the true value of insurance in the unfortunate event of a claim, which is why we work closely with you at renewal to ensure your policies are fit for purposes and more importantly suitable for your requirements.

What is ‘underinsurance’ and why can it occur?

Underinsurance is when your insurance cover, or sum insured, is less than the value at risk. Your insurance premium is calculated based on your individual circumstances and the amount of cover you choose to take out to protect your organisation or personal items. Underinsurance occurs when you’ve not taken out the right amount of insurance cover for your needs (or in other words your sums insured is less than the value at risk). Underinsurance leads to policies not functioning as intended, ultimately resulting in customers receiving less compensation than they need to adequately recover from a loss.

What does it mean if I am underinsured?

Taking out insufficient insurance cover will essentially mean any claim will be insufficiently covered. When a property is underinsured, insurers are entitled to reduce the value of a claim in proportion to the property’s underinsurance. This means that the insurer can reduce the claim settlement by the same percentage that the asset is underinsured.

For example, if the cost to rebuild or replace your property or contents is £100,000 but you have taken out insurance that will cover you for £50,000, then you would effectively be underinsured by £50,000 or 50%. Any claim you make will only be paid on the basis of the amount of cover you chose, based on what is called the ‘average clause’ – so in this example your insurer would only cover 50% of any claim, no matter the size of that claim. This would leave you needing to pay the remaining costs yourself which could be anything from hundreds, to thousands, to millions of pounds.

Incorrect or out-of-date valuations are a major cause of underinsurance. In the absence of regular reviews and valuations, it is easy for underinsurance to become present.

Our building valuations partner RebuildCostASSESSMENT.com have put together a simple 3-minute animation, which explains a little more about what the Average Clause.

How to ensure your company has the correct Business Interruption (BI) insurance

Most insurance policies have a ‘sum insured’. The problem for many businesses is that getting the right sums insured is often complex and the values in question can change quickly.

You may already know the definition of gross profit in insurance terms is different to an accountants definition. The gross profit sum insured is the amount by which the sum of the turnover, closing stock and work in progress exceeds the sum of the opening stock, work in progress and uninsured working expenses.

Turnover – Uninsured Working Expenses = Gross Profit

Uninsured working expenses are costs or specified expenses that vary directly with the level of trading. i.e they will decrease in direct proportion to the turnover in the event of a business interruption. As these costs will no longer be incurred as the turnover reduces, there is no need to reimburse them, and as such they are called ‘uninsured’ working expenses.

One major uninsured working expense for SMEs is purchases (raw materials, components, goods for re-sale) and may indeed be their only uninsured cost. However, other uninsured working expenses could include packing material, carriage (if charged on a unit cost basis), commissions, discounts allowed and bad debts.

The potential risk of underinsurance with high value home contents items

With changes in values, particularly specified items such as watches, it’s easy to under-estimate the value of your home contents and it is advisable to create a list (click here to download our contents calculator) which includes everything from furniture to curtains, televisions, laptops, garden furniture, bikes, clothes, carpets, jewellery, art and wine. It is also advisable to have an up to date rebuild valuation of your home.

We hope you found this useful. You are responsible for the accuracy and completeness of all the information you provide to us and your insurer. As always, we are here to help if you need to contact us or have any questions relating to your insurance arrangements.