Many businesses rely on assets such as plant and equipment so it's important that your insurance cover delivers the payout you need if it's damaged and you need to replace it.

The value you declare for your property and business assets in a commercial insurance policy plays a crucial role in determining the payout amount from your insurer in the event of a claim.

While most insurers allow for a 15-20% buffer, failing to declare an insured value that is at least 80% of the current value of your property could result in a reduced payout.

This is because insurers apply a co-insurance clause to safeguard themselves against clients who understate their property value to obtain lower premiums. Protect yourself from the consequences of this practice by ensuring you declare accurate asset valuations when sourcing insurance coverage.

Engaging an insurance valuation expert to assess your property and business assets is the most accurate way to determine values to declare on your insurance policy and avoid underinsurance. These reports estimate the cost of reinstating an asset at current value. This will ensure your sums insured adequately reflect the actual value of your property and business assets.

The impact of inflation

The issue of underinsurance has intensified due to the impact of inflation. With Australian consumer price index inflation rising to historic levels recently, it has been reported that plant and machinery assets recorded price increases of more than 25% over the past two years.

This means the insured value of your assets could be 25% lower than their current replacement value!

If businesses do not adjust their insurance coverage to account for inflation, they run the risk of being severely underinsured.

Factored together with the effect of the co-insurance clause, any insurance payout you receive will be substantially less than what is required to repair or replace your damaged assets, leaving you with significant out of pocket costs.

Underinsurance in action: a case study

A construction company owns an excavator that is currently worth $800,000. Due to budget constraints, they declare the value of the excavator at $400,000 in their insurance policy unaware that this amount is significantly lower than its actual market value.

The excavator sustains severe damage on a construction site, requiring extensive repairs costing $470,000. The business owner lodges a claim expecting to be reimbursed in full for the repairs. However, the owner's underinsurance becomes apparent.

Because the excavator was insured for far less than its current value, the insurance company applies the co-insurance clause and the business owner receives a claim payment of just $293,000 leaving them with a $177,000 shortfall to cover the repair bill.

Avoid the underinsurance gap

Involving an insurance broker who understands your industry sector and the risks that are particular to your business will help you ensure you have the cover you need. We're here to help. Connect with one of our experts who can help you organise a professional insurance valuation and address underinsurance today.

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