How not to be underinsured

Most business owners bank on their insurance protecting them from the financial fallout of an unforeseen event. Whatever the size or scale of the catastrophe, they trust it'll put them back on the straight and narrow.

Unfortunately, underinsurance is increasingly common in today’s shifting economic landscape. And despite over half (56%) of SMEs in the UK having insurance under their belt, it’s thought over half of them are underinsured.

Clearly, this poses a risk for many businesses. But why does it happen? And what steps can they take to not be underinsured?

Dangerous game

Everyone loves a bargain, true. But relying on cheap insurance or scrimping on the amount you buy can be a costly mistake. It's likely the level of cover will be too low, or the small print loaded with exclusions.

So, in the unlikely event you need to claim on your insurance, you'll cross that bridge if and when you come to it, right?

Problem is, insurers take steps to deter those who deliberately underinsure their business. That puts them perfectly within their rights to reduce the amount they'll pay for a claim proportionate to the amount you're underinsured by.

It's called the 'average rule'. Although it can crop up in policy wordings under different names: the 'average clause', 'underinsurance clause', or 'underinsurance penalty clause', for example.

Mind the (underinsured) gap

So, when do insurers apply the 'average rule'?

Well, if your level of cover is £100,000 and you make a claim for that amount but are found to be underinsured by 30%, your insurer could legitimately pay you just £70,000.

That's one example of underinsurance. The other is where your policy doesn't have an underinsurance clause. Your insurer simply refuses to cover your claim (gulp).

This might seem unfair. But we see it happen with products like professional indemnity (PI) insurance where the premiums are smaller. With those types of policies, if you don't buy enough cover to begin with, and your losses turn out to be greater, your claim won't get paid.

Not everyone's an expert, though, and it's easy to accidentally underinsure your business. Some insurers are more lenient with clients who've done just that but it's hard to be definitive. One size doesn't fit all.

Here's how to make sure you get it right.

How not to be underinsured for:

Buildings and office equipment insurance 

Buildings:

It's estimated two in every five commercial properties in the UK are underinsured. Both inside and out. Small wonder complaints to the Financial Ombudsman have increased by over a quarter.

With rising inflation and supply chain disruption affecting both the price and availability of building materials and labour, it’s important you review your level of commercial property insurance every year.

When calculating rebuild costs, make sure you factor in the preparation costs too. For example, you'll have to pay someone to get rid of any rubbish or debris, as well as making sure the area is safe to use.

And if you're lucky enough to have a listed building as an office, be aware that any rebuild costs are likely to be high. Work is also likely to take longer, as specific building supplies and equipment can be more difficult to source. If in doubt, commission a survey first.

Equipment:

Add everything up. And we mean everything. From carpets to coat racks to cups; from mouses to monitors to mobiles. If you needed to replace everything your business owns, in one go, at the same time, you need to make sure your level of cover is enough to do just that.

To avoid underinsuring your general office equipment, it's good practice to review your level of cover every year. Especially if you’ve updated your fixtures and fittings recently, or bought a new piece of kit or software. Don’t forget to account for seasonal stock increases and hired equipment.

Ideally, keep an inventory of what's what and put someone in charge of updating it. If a director takes this on, they should be aware that they're liable for the shortfall if failure to keep track of assets means the company is underinsured when there's a claim.

Business interruption

If there's some kind of business crippling disaster, business interruption insurance keeps you up and running while your property insurance sorts out a more permanent solution.

However, your level of insurance must be enough to cover both your income losses and added expenses for the entire time you’re out of action.

When working out how much cover you need, be realistic about how much income you could stand to lose. If you’ve lost specialist machinery, equipment or essential software, or have to temporarily set up elsewhere, it might take you longer to reboot your business.

What if you lose clients to your competitors? Or have extra costs you have to cover? Bear in mind, too, that if your equipment is particularly niche (hello, photographers and videographers), it may take a while to find replacements, especially if it has to be sourced from abroad.

Professional indemnity insurance

With professional indemnity insurance, the most important things to consider are the likelihood of a claim, and the potential cost of that claim.

You should think about what you do, what clients you work with, and how much your contracts are worth.

Bear in mind that if the total cost of a claim exceeds your level of cover, your insurer won't pick up the shortfall.

That's especially important if your policy is 'in the aggregate'. It means your policy only gives you a certain amount of money (the level of cover) to pay all claims in one year . If you reach this level of cover in just one claim, there's nothing left to pay anything else.

As every business is unique, it’s hard to be prescriptive. Our guide can help you decide how much professional indemnity insurance you need to not be underinsured.

Making sure you're not underinsured

There's a lot to consider when it comes to making sure your business is well covered.

Obviously, it pays to keep your insurer in the loop when something changes, like if your turnover goes up. They'll know best whether or not you need to increase your level of cover.

It's also good practice to use your insurance renewal as an opportunity to check your levels of cover.

Don't forget, you have obligations under the terms of your policy. Insurers may be inclined to treat you less leniently if you've gone past your renewal without making any necessary adjustments.

For more info, check out our guide to understanding underinsurance.

And if you're not confident you've accurately insured your business, feel free to call us on 0345 222 5391 for some advice.

Image used under license from iStock.