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Underinsurance - 10 Points to Consider

Published: 30/06/14

The issue of underinsurance is something that we’ve covered several times via this newsletter, but the problem persists. And whilst it is still happening – as your insurance broker we have to discuss it – it is too important to ignore.

What does it mean?

Underinsurance – not setting adequate sums insured, i.e. below the full cost of replacement for material damage for buildings, contents, plant, stock etc. Any event that gives rise to a claim means that it invariably it will not be paid in full because of an average clause.

Average clause = is a standard market policy condition that requires the amount of a claim payment to be proportionately reduced if the policy holder has not insured their property for the full value or replacement cost. E.g. If deemed 40% underinsured = 40% deduction of final settlement. (Other average clauses may apply depending on the policy type, such as special condition of average, two conditions of average, day one average memorandum etc – but broadly the intention is that full replacement values are insured)

10 key points to consider

1. Average clauses do apply, so you cannot simply opt for a figure that you are comfortable with – your business depends on you insuring it for the full replacement sums insured. If for example you undervalue your stock by 30% your claim will be duly underpaid.

2. Like home insurance, a common misunderstanding is to insure the perceived market value for buildings, not the full replacement sum insured (which includes more than just the rebuilding cost, see below).

3. Take into account debris removal/demolition/professional fees e.g. if asbestos or likelihood for site contamination in the event of fire this will increase costs as specialist contractors may be needed to remove debris

4. Assess if there are any specialist foundations or unusual features such as underground car parking, cellars etc.

5. Make it a priority to understand the latest building regulations and legislation (we can help, seek advice on this). Consider the whether there any public authority requirements for additional features (e.g. to install lifts), which may be a legal requirement during reinstatement, even though they were not there prior to the loss.

6. Is the building ‘historic’ or have ‘listed’ features – likely to have a significant impact on the cost of reinstatement due to the requirement to source original materials or those which are sensitive to the heritage of the building.

7. Be clear on what is defined as a ‘Building’ – these generally extend to landlords’ fixtures/fittings, outbuildings, car parks, yards, boundary walls/fences, pavements, underground pipes/cables and even onsite electricity control gear extending to the public mains. Stock sums insured may also need to include goods which you hold in trust (your customers stock) and are responsible for.

8. Is any of the plant/machinery or equipment obsolete? If so, replacement costs may be higher that expected, due to specialist installation and commissioning costs.

9. Impact of inflation/VAT – depending on the loss, full reinstatement may not be completed until many months after the sums insured were selected (even if Day One basis – correct sums insured at inception required)

10. Green updates are a real issue; new buildings will probably need to incorporate minimum energy efficiency standards or even upfront agreement for a different building style. Reinstatement sums insured must incorporate all of these costs.

If you need more information about any of these points or other areas of insurance we are here to help – call Dawn Charlesworth on 0845 371 1452, email: dawncharlesworth@flintinsurance.co.uk

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