What Is Underinsurance?

InformationAn astounding 95 per cent of businesses in the East Midlands were underinsured in 2012, according to a recent study. But the high number of underinsured businesses is not solely relegated to the East Midlands. Employers throughout the United Kingdom must ensure their businesses are protected against the widespread threat of habitual underinsurance. A property is underinsured when the amount of cover is less than the amount it would take to rebuild the property. Due to the economic downturn, many employers mistakenly believe that their commercial property insurance cover, like rebuilding costs, should match their depreciating property values. But market value is a poor index to judge rebuilding costs. Rebuilding costs should always be reflected in the sum insured. If the sum insured is less than the rebuilding costs, a business will be underinsured and will have to pay out of pocket to rebuild in the event of an insured loss. You can avoid being underinsured by diligently valuing your property and contents every three to five years. Professional valuers will factor building materials, increased labour costs, professional fees and debris removal into their valuation. Their estimation will also account for inflation and price increases. Employers also routinely underestimate the time needed to rebuild and re-establish business under Business Interruption (BI) cover. This time period is known as the Maximum Indemnity Period (MIP). BI insurance protects against losses when a business is forced to stop operations temporarily. BI cover can help a business earn the profit it would be earning had the incident which resulted in loss not happened. If an employer specifies an inadequate MIP, the business will have a hard time recovering from a loss. MIPs should be long enough to return a business to full operating efficiency and calibrated to allow for ample rebuilding of the property and the customer base. When setting the MIP, be sure to consider: construction materials, property size, design complexity, building height, the local construction market, authority controls and regulation, and licence issues and planning problems.

Plan ahead and you can mitigate the risks of underinsurance. Contact Bromwall to ensure you are prepared – Contact us on 01707 883377 or email us on info@bromwall.com.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

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