Are your current sums insured adequate?
We have seen the holiday park industry experience many obstacles and events over the last few years mean that we are still experiencing high levels of inflation. If your sums insured do not represent the full value of the property you are insuring, you may not receive the full amount in the event of a claim.
Why is underinsurance happening?
Underinsurance is a common occurrence in the UK today, with 80% of businesses estimated to be underinsured. The cost of rebuilding has risen significantly due to inflation and supply chain disruptions driving up the cost of materials. The greatest price rises include pipes and flexible fittings (up by 23%), ready-mixed concrete (up by more than 14%), & doors and windows due to the cost of metal rising by 17.5%. Construction expenses are predicted to go up by a little more than 3% by the third quarter of 2024* and these rising costs are outpacing the value of many insurance policies. This is a significant cause of underinsurance and can leave businesses unnecessarily exposed to financial risk.
What is underinsurance?
Put simply, underinsurance is when a policyholder has inadequate insurance cover for their needs. In the event of a claim, this could mean a claim amount exceeding the maximum limit that can be settled by the insurance company. This could result in a shortfall for the policyholder, potentially leading to a serious financial loss for the business.
What can this mean for your insurance cover?
If you have hired fleet and sales stock insured on your park’s policy, it is important to understand the potential impact of the increased costs of replacement. It is your responsibility to ensure that your sums insured are adequate, otherwise, in the event of a claim, deductions may apply due to underinsurance. Similarly, if one of your park buildings needed to be repaired or rebuilt following an insured incident, underinsurance could leave you facing serious financial consequences.
Underinsurance in action — the ‘Average Clause’
Allowing your property valuations to become outdated and inaccurate could have negative implications for your cover. If your building’s insurance does not cover the total reinstatement cost, and you need to make a claim, you may not get the pay-out you were expecting — however large or small your claim amount. This is because the percentage you are underinsured by can be deducted from your pay-out, under the ‘average clause’ in a policy.
For example, consider a park clubhouse with a current sum insured of £1 million. A fire occurs, which damages most, but not all, of the property. Insurers appoint loss adjusters, and they calculate the property’s true rebuilding cost to be £1.2 million (in other words, it was underinsured by 20%). The cost of the loss is calculated to be £800,000. However, once the insurer applies the Average Clause, the claim payment is reduced by the amount of underinsurance (20%) — leaving the policyholder £160,000 short of the full repair costs.
What problems can underinsurance cause?
If a claim payment does not cover the full property repair/rebuild cost or reinstatement, it could mean funds may not be available to complete the rebuild.
This may result in the following:
- Negative impact on service delivery to your customers
- Prolonged unavailability of buildings, machinery or plant
- Complex and extended negotiations with insurers, resulting in extended rebuild times and drained management resources
- Requirement to borrow on already stretched budgets
- Exposure to potential legal action for inadequate levels of cover from lenders and leaseholders
- In the worst-case scenario, the business may never recover
What are the common areas of underinsurance?
The most common reasons for underinsurance in holiday parks we see typically fall within the following areas:
Stock, hire fleet, and contents:
If you were to insure only part of the total value of your stock, hire fleet or contents on the basis that it is unlikely to suffer a 100% total loss of those items, you would be overlooking the fact that the total figure still needs to be known by an insurer. Policyholders may believe they can claim up to that limit, however, this is not necessarily the case. This is because the Average Clause of a policy allows insurers to pay a lot less if a policyholder has underestimated the declared value of stock/hire fleet/contents.
Claimants often assume the current or second hand value will suffice in the event of a loss. You should check with your broker about the basis of settlement, i.e., reinstatement new-for-old, or indemnity (market value). If you do not have new-for-old cover, your pay-out will likely be insufficient to replace the assets you are claiming for.
Buildings insurance:
Buildings should be insured for reinstatement cost, i.e., the most you would need to rebuild and replace your park buildings from scratch.
You will also need to make allowance for the following costs:
- Architects, surveyors, legal and professional fees to rebuild or repair your buildings
- The cost of clearing debris, dismantling, demolishing, shoring up, propping up, or supporting parts of your building which have been damaged
- Other costs necessary to meet government or local authority requirements
- Costs incurred in the delivery and/or re-siting of any insured building at the premises
A valuation from the Royal Institution of Chartered Surveyors (RICS) is recommended to help you determine reinstatement cost.
Business interruption:
It can be easy to underestimate how long it would take for your business to get up and running again after an insured event. Often, a period of cover is far shorter than the actual period of disruption, leaving a park owner with ongoing losses after the insurer stops paying. To work properly, your policy requires a thorough and up-to-date assessment of the interruption exposure. This should include a business continuity plan that represents a true picture of the time and resources you need to achieve pre-loss turnover levels.
Inflation:
Insuring for an outdated purchase price can prevent replacement for that same cost. Consider mid-term fluctuations in material costs through inflation or market forces. Certain types of goods are more subject to market forces than others with some having the potential to increase in value significantly in a short space of time. Insured sums should ideally be automatically index-linked to inflation.
Insufficient insurance reviews:
Failing to review historical sums insured at policy anniversary may lead to gaps in cover. Acquiring new plant and machinery, adding a new computer system, or increasing stock levels are not always quickly linked by customers to the need for an insurance conversation. It is best practice to undertake this annually, in addition to discussing changes with your broker at your review meetings throughout the year.
How can you ensure all areas are covered?
We encourage you to regularly review your sums insured to take into account various changes and challenges that may affect your park, such as building work on-site, weather/climate-related risks, or an increase or decrease in stock. Use the key underinsurance risks we have outlined as a guide to help you assess whether your cover is adequate for each area of your business. If you have made significant changes to your assets, property, stock, or business activities, let your broker know straight away — don’t wait until renewal.
Your customers should also be aware of the potential effect on their own insurance cover when replacing their caravan, so it’s important to have this conversation with them to help ensure they are adequately protected, too.
How Gallagher can help?
Our specialist team can work closely with you to help ensure all aspects of your business are sufficiently covered. We can conduct an insurance review and then tailor a policy to suit your park — with bespoke policy wording available to suit your specific requirements.
We also offer park surveys and valuation services whereby we can provide buildings replacement sum insured values through our partnership with a RICS-approved company (with valuation reports supplied within 14 days of the survey).
If you would like to find out more, contact 01452 801700.
