Regional Client Service Director Andrew Marvin was joined by colleagues – Regional Broking Director Amy Coughlan and Loss Controller Team Leader Andrew Collins – as well as Andrew Slevin, Director at specialist valuers, Charterfields. The expert panel examined what underinsurance is and how to avoid it.
Underinsurance can occur in a number of ways but is most common when building valuations are out of date. Rebuild prices have risen dramatically, making clients’ insured values too low and business interruption insurance (BI) indemnity periods too short.
Recent Gallagher research found 43% of commercial property owners who rebuilt their assets in the last year were underinsured.
Why is underinsurance increasing?
Inflation has been rising for several months, pushing up prices in shops and, importantly, products for commercial use. In the same period, Charterfields saw rebuild costs rise by around 12-16%. This was driven by general inflation of labour and materials, increasing energy and transport costs and supply chain issues. Iron and steel costs are up by over 70% from pre-pandemic levels1, and UK manufacturing output prices rose by 14.7% in the 12 months to December 20222. This matches our own claims research, showing that 61% of all properties are underinsured.
What are the implications of underinsurance?
If you have a claim and you’re underinsured, your claim won’t be paid in full, so there’ll be a shortfall.
Most policies contain an “average” clause, which makes the policyholder bear part of the loss if assets were underinsured – usually the same proportion as the level of underinsurance.
If the underinsurance is significant (say around 50%), insurers can argue this is reckless or deliberate misrepresentation and void the policy altogether, leaving a policyholder with no cover when they need it most.
It’s not just inadequate values that create underinsurance. Materials are taking longer to source, and labour to reinstate damaged assets is scarce, so indemnity periods under BI insurances can be too short. The insurer will pay for loss of profit and extra expense for a specified period, but they won’t pay beyond this point – even if losses continue. In the recent past businesses have been comfortable with a 12 or 18 month indemnity period, but now they’re finding it’s too short.
How do I avoid underinsurance?
Reviewing and updating values to ensure accuracy is critical. Supplying correct sums insured has to be top of everyone’s list. The simplest and best way is to review asset values thoroughly – ideally using specialist valuers – and carry out a business impact analysis to test what would happen if there’s a major event like a fire and how quickly the business could recover. This will provide valuable guidance in setting the BI indemnity period.
You can watch the webinar on demand and sign up for the next instalment here.