When you start a business, you need to consider how to protect it. Insurance is a given and, in some cases, a legal requirement. However, not all insurance policies are the same and sometimes, there is a risk of inadequate insurance policies resulting in underinsurance for your business.
Underinsurance is when a policyholder is not adequately covered for their needs. It can result in a claim amount exceeding the maximum limit outlined as a settlement figure when subject to damages. It can result in a shortfall which the business owner then needs to cover should a claim be made against them or if they have to claim to rebuild their property or assets following damage, theft or fraud. Commonly underinsurance is associated with contents, equipment, business interruption, buildings and cyber liability.
Underinsurance can happen in several ways. You can miscalculate the amount your contents are worth or have a best guess at the value of your building. In addition, your policy could have been taken out when you started your business, and you have not increased the amount of coverage as your business grows.
While underinsurance is often due to an oversight by the policyholder, some policyholders deliberately chose insufficient cover. This could be because they believe that they aren’t at risk or are trying to get lower premiums and declaring different amounts than what is required to cover them. There are profound implications for business owners who do this, and it is vital that you never purposely underinsure your property or your business assets.
In the event of underinsurance, you may find your insurance providers applying the average clause. This clause states that if the assets of the policy are insured for less than their total replacement value, the policyholder is responsible for bearing a proportion of that value.
You may experience severe financial loss or excessive legal fees when your business is underinsured. Risks of underinsurance include:
To put it simply, you need to ensure your policy covers the correct value of your business assets and property.
To do this, you need to make sure you are aware of your business costs and declare their full value when taking out insurance for the first time.
When it comes to business property insurance, getting a valuation from a builder as to how much your property would cost to rebuild is one of the best ways to stop your property’s undervaluation. You can also use online calculators and tools that will help you understand the total value. However, the best tool to use would be the Association of British Insurers' online calculator, as this is often accurate.
In addition, keeping a record of your costs can help. The initial costs of the equipment and contents of your business location give you a good idea of how much replacing them will cost. With this, you can ensure you are covered for the total amount to replace these. Or at least take out cover for the equipment and contents your business absolutely needs to operate.
When you are looking to renew your policy, you should consider a new building valuation every five years to ensure your coverage protects you. Also, any additional items added to your stock or equipment or changes to your property that could result in a more expensive rebuild are considered within the amount of cover you are taking out.
You may also want to consider a buffer in your policy to account for the effects of inflation. While some building policies have this covered when it comes to rebuilding costs with a sum insured value, the contents replacement value may differ from when you bought them, and you may only get the value they were worth at the time of purchase.
The most important thing to consider when taking out an insurance policy is that they are designed to put your business back to the position it was prior to the incident you are claiming for.
For example, if you have a flood and you need to replace the computer system in your office, you will also need it to work. Therefore, you are paying not only for the computers but the cost of reinstating the IT network and installation, so they work the same way as before.
Also, consider virtual issues, not just physical ones. So many business owners forget about the risks associated with their networks and what a result a cyber attack could have on their business. You may need to cover legal fees, but also implement a new security system and have a full IT consultation carried out, complete with further training for your staff. While covering this kind of event may seem like overkill, you will be grateful to have a comprehensive cyber liability insurance policy in place should the event take place.
As insurance brokers in Bolton, we can help businesses across the UK understand their requirements when it comes to insurance and ensures you take out the right cover so that you don’t run the risk of underinsurance. You are still responsible for the disclosure amounts, so offer as much information about your property and business assets as possible. We will do our utmost to ensure that your policy will protect you fully in the event of a claim.