Underinsurance: Don’t risk it!

Many small- and medium-sized businesses in the UK are risking their own survival by unwittingly remaining underinsured.

The Building Cost Information Service (BCIS) report, although conducted in 2012, revealed that 40% of businesses do not have enough business interruption cover to get them back on their feet. Furthermore, in 25% of SME claims reviewed by the FCA in 2015, the indemnity period expired before they returned to the normal trading position.

You may only find out that your business is underinsured when you experience a major loss event, such as a data breach, flood or fire, and need to make a claim. Be proactive and know your status now so you can fix that gap and be prepared for anything.

 Why getting the right level of insurance cover is critical to your business

Insurance companies base their premiums on the value of the risk they are insuring, which is usually based on the information a policyholder provides.

Under-insurance can arise as a result of a failure:

  • to correctly assess the amount of insurance cover you need
  • to understand how to arrive at a suitable sum insured or limit of indemnity
  • to understand what a sum insured or limit of indemnity represents
  • to select an appropriate indemnity period for business interruption cover
  • to take account of the fact that accountancy definitions of gross profit are different to insurance definitions when arranging business interruption cover
  • to obtain up-to-date valuations
  • to keep sums insured under review from year-to-year
  • to recognise that policy standard limits are not always enough
  • Your obligations

Under the Insurance Act 2015, businesses have certain obligations when applying for their insurance. The requirements of the Act are designed to help you get fairer treatment from your insurer in the event of a claim. However, they also require you to be strictly honest about the nature of your risk.

Top 12 tips: how avoid under-insurance

  1. Use a professional valuation service to help you decide on your sum insured. Regular valuations will help ensure accurate assessment. Here are some useful online tools https://abi.bcis.co.uk/ or http://www.rics.org/bcis.
  2. Sums insured for buildings should be based on the cost of rebuilding not the market value.
  3. Consider buying declaration-linked business interruption insurance because it provides an uplift of 33% as long as the sums insured and period of indemnity are initially correct and declarations are made when requested by insurers.
  4. Make sure your assessment of gross profit matches the one on your business interruption policy- remember, accountancy and insurance policy definitions of annual gross profit are different.
  5. When selecting an indemnity period for business interruption, remember that 24 months is likely to be the minimum period needed for a business to fully recover its trading level and rebuild its customer base after a major incident.
  6. Liability insurance policies are complex. Make sure that you have considered the risk of claims against you and check whether you have taken on any liabilities under your terms of business contracts.
  7. New risks sometimes emerge. Consider how the risks to your business change, including risk areas such as cyber or data protection. The cyber essentials tool can help you to guard agains the most common cyber threats and there are some more indepth tools available if you wish to contact us to discuss.
  8. Always check documentation carefully. Many insurers make an effort to draw your attention to the important conditions of your policy, but it is always important to check to make sure there are no errors.
  9. Disaster recovery or business continuity plans may help you recover after a loss.
  10. If buying a simple online package policy, check that the liability limits of indemnity, business interruption indemnity periods and other standard policy limits are sufficient.
  11. Consider the cost of claims preparation; costs such as the cost of instructing an expert or accountant, are not usually included in your insurance cover and can be expensive.
  12. Get help from a broker. We want to ensure that you buy the right insurance for your business and now have access to a number of online facilities which can assist you in setting a more precise calculation of your sum insured. All that we need is a copy of your accounts and a little bit of your time

Complete Your Cover

Your business is your lifeblood, and you should do everything you can to protect it—this includes properly insuring it against any possible damage. CLEAR is on hand to help you review your policies and to ensure that you are properly prepared in the event of a claim.

Contact your nearest CLEAR office, if you would like further guidance:

London: 020 7280 3450

Horsham: 01483 274792

Maidstone: 01622 683913

Leamington: 01926 420 555 

Spalding: 01775 716570