The Financial Conduct Authority (FCA) estimates that around 40% of SMEs are underinsured. Among the reasons for this are, some business owners believe they are adequately insured, without checking the detail, whilst others have used low figures as a means of reducing insurance premiums. Both are gambling with the future of their business, falsely believing they are fully covered.
The cost of under insuring
Take the case of a business that has insured its premises for £800,000. When the building is damaged by fire, it is calculated during the claim process that the rebuild cost is actually £1,000,000. Based on this the client has only paid a premium for 80% of the risk so using an ‘average’ clause in the contract, the insured will only be covered for 80% of the repairs leaving the business with a large shortfall. The slight increase in the cost of the policy to ensure adequate cover was in place would have been a small price to pay, compared to the amount now required. Such scenarios are all too common, with the amount initially saved on the premium never equating to the consequences of a major loss.
What steps can an SME take to ensure the business is adequately insured?
There are a number of basic guidelines to follow. To start with, ignore the market value of the building and base cover on the cost of rebuilding. Cover for stock and equipment should be based on the new replacement cost and not on the written down book value. You should also consider whether busy periods in your business may need higher levels of cover.
Business interruption shouldn’t be forgotten.
Business interruption is another key area that is often uninsured. If your building is destroyed and needs to be rebuilt, it may take longer than you think to return to business as usual, and you may need temporary premises during the rebuild. What happens if you have cover in place for 12 months, but it actually takes 3 years? Factors such as site clearance, use of cranes, availability of building contractor, inspections, unforeseen issues and re-stocking can all cause delays, which is why it’s essential to have the appropriate level of business interruption insurance in place.
Remember, you could be underinsured, if:
- You haven’t had your property professionally valued recently
- You have altered or extended the property
- Your insurance cover has been based on the market value of the building when it should be based on what it would cost to rebuild your property
- You haven’t factored in costs for gates, fences or car parking areas
- Your property is a listed building – the time and cost of repairs/rebuilds are likely to be far greater than for an unlisted building, impacting your business interruption cover
- You haven’t factored in the costs of professional fees such as an architect or surveyor
- You haven’t factored in costs such as site clearance or access – particularly where your business might need, for example, a crane or heavy plant to help with remedial work as a result of a claim.
- You have more contents/stock now than when you took out your insurance policy
- You are now VAT registered
- You have some new plant or equipment that you haven’t told your broker/insurer about
For a free insurance review, please contact a member of our team, on 01509 274000