Insurance Services

A major focus for 2017...

The Perils of Underinsurance


February 2017

The Financial Conduct Authority (FCA) have made under-insurance a major focus in 2017. Fair Representation of Risk was also introduced via the Insurance Act 2016. The FCA has carried out a thematic review recently and discovered that, of the claims analysed, 22% of sums insured proved to be inadequate. In some cases, sums insured were less than 50% of the actual loss.

It is important that you establish accurate rebuilding or replacement values for buildings and contents, in order to avoid any claim payments being reduced due to the Condition of Average. In the event that you suffered a claim and the sum insured was below the replacement value, the claim could be reduced by the percentage of underinsurance. For example, if the sum insured were to represent 9/10ths of the true value then you would be paid £90,000 for a claim of £100,000.

Your property sums insured must be sufficient to rebuild or replace the property or item, in the event of a claim. For Buildings this figure must also allow for site clearance, architects’ fees and VAT, amongst other things. The contents figure should represent the replacement cost (as new). The stock figure should represent the cost-price minus VAT if registered.

Inadequate Business Interruption insurance cover can seriously impact the ability of a business to recover following a loss. Business interruption cover is a notoriously difficult area to understand and The Insurance Institute of London estimate that around 40% of policies are underinsured. The problem arises due to misunderstandings of the term ‘gross profit’. The definition of ‘gross profit’ for insurance purposes differs significantly from an accountant’s understanding of the term. As a result, businesses frequently declare incorrect figures, resulting in underinsurance.

Indemnity Periods are another Business Interruption consideration. This indemnity period should reflect the total time to get your company to the trading position it was in before the loss (total devastation). This will include rebuilding, replacing lost equipment and also winning those contracts lost during the interruption. The majority of most Insurance contracts are based on a 12 months Indemnity period which is woefully short. The minimum most companies should have is 24 months.

Business continuity planning can help a business understand what risks they are facing, how best to combat them and to check their insurance cover is adequate in the event of a large range of scenarios. This puts your business in a better position to assess and plan for the probable consequences, thereby hopefully reducing the period over which they will be affected by a loss.

Businesses should engage with an insurance broker to obtain professional advice, instead of opting for the cheapest insurance they can find themselves. Woodward Markwell Insurance Brokers can provide practical advice to help you and your business assess the risks involved, in order to insure your business correctly and give you the confidence that your policy will respond, especially when you need them most.

Thomas Hallatt - E-mail: / Tel. 01473 408498