Underinsurance at the time of a claim continues to be a significant issue –

  • The Building Cost Information Service (part of the Royal Institution of Chartered Surveyors) stated in 2020 that 80% of commercial properties were reported as being underinsured.
  • QuestGates Ltd, the British Insurance Brokers’ Association’s (BIBA) accredited Valuation facility, indicate that 70% of cases they handle involve some form of underinsurance.
  • The Financial Conduct Authority’s (FCA) thematic review into SME claims found that out of 20 cases they investigated, 12 had underinsurance issues.
  • The Chartered Institute of Loss Adjusters (CILA) report that 44% of all business interruption claims that their members handle involve underinsurance and the underinsurance shortfall was on average 44%.
  • Inflationary pressures are affecting the cost of building materials, and labour shortages in the building industry are also increasing costs.

The implications of underinsurance are that your insurance company may reduce the claim by the proportional amount of underinsurance that is applying at the time of a claim.

Buildings – the building declared value that you select should represent the rebuilding cost of your property, including an allowance for debris removal/site clearance and an amount for architects, legal and other fees that may be incurred in the reinstatement of the building. Don’t forget external walls, paths, gates, fences, car parks, outbuildings, etc. Special consideration is required for listed buildings. The sum insured for your building IS NOT the market value of the building.

Business Contents – the contents declared value should represent the replacement cost of your contents as new – ‘new for old’ basis. If you purchase a second-hand item you should insure the item for the replacement as new cost, not the amount paid for the second-hand item.

Stock – the sum insured should represent the value of all stock and materials in trade (including work in progress) belonging to you, or for which you are responsible (customers’ goods). When setting the sum insured, consideration should be given to the maximum value at risk during seasonal or peak trading periods.

Business Interruption – cover may be arranged on a Gross Profit (may also be known as Loss of Income or Insurance Profit), Gross Revenue or Increased Cost of Working basis, and different sums insured would need to be selected dependent on the basis of cover.

We would stress that if cover is arranged on a Gross Profit basis, your insurance company’s definition of Gross Profit is different to your Accountant’s definition as would be showing in your annual accounts.

Please speak to us for specific guidance.