ACCORDING to research by the Building Cost Information Service, which is part of the Royal Institution of Chartered Surveyors, 80 per cent of commercial properties in England and Wales are underinsured.
Also in its recent thematic review of commercial claims*, the insurance industry regulator, the Financial Conduct Authority discovered that in 12 out of the 20 case studies there were issues relating to sums insured. In eight cases property sums insured for buildings, trade contents and stock were inadequate. The FCA has described this as “an alarming degree of underinsurance’.
The same problem of underinsurance applies to other areas of insured risk, including business interruption and consequential loss. In the same review, the Financial Conduct Authority revealed that nearly 25 per cent of the business interruption claims examined involved the period of loss exceeding the insured indemnity period. In many cases, this would leave businesses without the cash to see them through to full recovery.
Recent Aviva SME Pulse research** found that nearly two thirds (62 per cent) of UK SMEs either do not have business interruption insurance or are unsure about whether it is included in their current business insurance policy. Despite this, one in five surveyed (21 per cent) said they had experienced disruption to their business. Some resumed normal business trading relatively quickly, i.e within a few months. However, most were affected for up to two years and more.
The widespread problem of underinsurance and claims not being paid in full, has seen the British Insurance Brokers’ Association publish specific advice for businesses. This is in an attempt to highlight the problem. BIBA believes that too many businesses focus on the price of their policies and not on the adequacy of their sums insured. It is true that competitive premiums are important, however with a likely premium payable for general commercial property of little more than £100 for £100,000 of sum insured, low insurance valuations could be a false economy. It is much better to have appropriate levels of cover and peace of mind in the long term.
Another potential issue for businesses to consider is the change in the rules of duty of disclosure, introduced by the Insurance Act 2015. The new legislation reemphasises the duty to disclose material circumstances to insurers. Inadequate sums insured or indemnity periods could be regarded as material. If deliberate or reckless, insurers have the right not to pay claims, even in part. Although this would only be in extreme circumstances, it demonstrates the need for businesses to review their values at risk and basis of insurance.
As well as keeping insurance costs down, common reasons for underinsurance include
– no consideration of the replacement of damaged foundations, gates, fences or car parking areas
– listed buildings and the time and cost of rebuild work impacting business interruption insurance cover
– Site clearance, site access costs and professional fees not considered.
All of this shows just how important it is to get it right, before anything goes wrong. For a copy of a Towergate client briefing, with helpful tips on how to avoid underinsurance and access to a specialist insurance valuation service, please email .
Towergate Insurance is a trading name of Towergate Underwriting Group Limited. Registered in England Company No. 04043759, registered address Towergate House, Eclipse Park, Sittingbourne Road, Maidstone, Kent, ME14 3EN. Authorised and Regulated by the Financial Conduct Authority.
*Source: BIBA, Professional Indemnity Volume 6: Managing Under-Insurance – A guide to prevention. 5th May 16.
** Research conducted online by RedShift February 2016
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