SMEs In Essex At Risk of Being Underinsured
Underinsurance is a big issue, especially for small to medium sized businesses renewing a packaged insurance policy.
If you are a small business, you should make sure that your insurer is aware of the correct value that is at risk in your business. Maybe your business has grown, maybe you have taken on more staff, or maybe you have increased stock, or bought new machinery.
If you do not update your insurer with these changes, especially at renewal time you run the risk that your sums insured are inadequate, leaving you underinsured in the event your business is affected by fire, flood, escape of water, theft or business interruption.
The Importance of Adequate Sums Insured
The FCA reviewed 97 files for claims in excess of £5,000 and discovered that in 21 of them the sums insured on some aspect of the cover were inadequate, and would not cover the actual loss suffered by the policyholder. The 2015 report Handling of insurance claims for Small and Medium-sized Enterprises (SMEs) reveals that in some cases the sums insured were below 50% of the amount required to cover the loss; in 8 cases the material damage sums insured for buildings, trade contents and/or stock were inadequate; and in 4 cases the loss exceeded the 12 month maximum indemnity period.
To give you an idea of how this type of underinsurance can affect a business, here are a couple of examples from the FCA report:
A leak from a water tank caused extensive damage to the building where an SME was based. Around £80k of damage was caused. The Sum Insured on the building was less than half what it should have been in order to fully cover the building and the claims settlement was reduced accordingly.
A catering firm suffered a major fire. The business contents were hugely underinsured: damage to the contents was estimated to be half a million pounds, but the claim was settled for less than half of that. Similarly the Business Interruption cover was only for twelve months and this proved inadequate for the business to get back to its former level of profitability. This business therefore suffered huge financial losses as a result of being underinsured.
Calculating Appropriate BI Indemnity Periods
Inappropriate indemnity periods for business interruption, which affected the catering firm in the example above, is a common underinsurance issue – especially for businesses that have unusual premises and specialist machinery. For many specialist SMEs, a 12 month indemnity period is just not a sufficient amount of time to get the business back up and trading as before – some companies should really be looking at business interruption cover of 24 or even 36 months.
Talking the true value of your business over with your broker, taking into account what losses would be faced based on forecasts rather than historical accounts will help determine what the appropriate indemnity period should be.
Accounting For Loss Assessors
Deciding not to pay a bit extra on a policy to cover the cost of a loss assessor is another area where SMEs are at risk of being under insured. In the face of a BI claim, managers and owners could find themselves spending many months trying to sort claim paperwork – precious time that should be spent getting the business back up and running.
Having insurance in place to pay a professional to take on this work for you can be another factor that could affect the future of your business.
Why has underinsurance become a problem?
It comes down to the commoditising of products. A small business gets a package that is for a set sum, and there is an assumption that the cover is adequate. Each year they renew their insurance without a thought to the growth that has occurred in the business, and the sum insured ends up out of whack with the actual value in terms of stock values, loss of profits, and the cost of rectifying damage to premises.
Insurance Experts say that if you do nothing else please check the adequacy of your sums insured now and if you think they are wrong please contact us immediately.
It has never been more important to take out appropriate levels of cover – the future of your business could depend on it. Give our experts a call on 01245 500433 to discuss the level of cover that is right for your Essex SME.