The content of this Risk Insights is of general interest and
is not intended to apply to specific circumstances. It does not purport to be a
comprehensive analysis of all matters relevant to its subject
matter. The content should not, therefore, be regarded as
constituting legal advice and not be relied upon as such. In relation to any
particular problem which they may have, readers are advised to
seek specific advice. Further, the law may have changed since
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Many businesses risk their own survival
by unwittingly remaining underinsured. Follow these tips to ensure your
business has the proper cover to defend against disaster.
The Dangers of Being Underinsured Many
businesses, regardless of industry, are risking their
own survival by unwittingly remaining underinsured.
The problem is widespread and perennial, and a
cataclysmic event can strike at any moment, leaving
businesses vulnerable to complete destruction.
A 2012 survey from the Building
Cost Information Service found that 80 per cent of commercial properties in the
United Kingdom were underinsured. An October 2014 survey of small- and
medium-sized businesses in the UK found that about 62 per cent of respondents
were underinsured due to a lack of business interruption insurance or because
they did not even know if this type of cover was included in their business
You may only find out that your
business is underinsured when you experience a major loss event, such as a data
breach, flood or fire, and need to make a claim. Be proactive and know your
status now so you can fix that gap and be prepared for anything.
What Does It Mean to
If your business is underinsured,
it means that you possess policies but your
assets are valued and insured at less than
their true value, leaving your business inadequately
protected. Therefore, in the event of a disaster,
you would be compensated for less than the true
value. A shortfall in your insurance payout could ruin your organisation.
Businesses can be underinsured for many reasons.
Often it is because business
owners think that a major loss event will never happen to them, so they do not need
comprehensive protection. But inclement weather, a cyber-security hack or a
destructive fire can impact and destroy any business. Business owners may fail
to review their cover and leave sums insured and estimates untouched for years,
despite major changes at their organisation such as additional employees, new
equipment or recent construction. And because buildings and content are typically
insured for their reinstatement value (how much it costs to rebuild),
neglecting to habitually update your sum insured could mean you are only insured
for the initial market value (the price of the property when you bought it) and
thus, you would only
be partially covered by your
policy for rebuilding costs in the event of a partial or total loss.
Sometimes business owners choose
to underestimate building costs and remain underinsured simply because they
want to save money on their insurance premiums. But the short-term savings can
never compensate for the out-of-pocket payments required to complement your
insurance payout in the event of an insured disaster.
There are many different reasons
businesses find themselves with inadequate insurance cover—but the most
important thing is to recognise when your business is underinsured, to
understand the attendant risks and to take action that increases your cover.
The Dangers of Being
What Is the Danger of Being Underinsured?
Being underinsured threatens a
business’ entire survival. A single loss
event, no matter how trivial, can be
disastrous if a business is underinsured and thus receives an insurance payout following the loss that is
insufficient to return the business to its pre-loss
But a meagre sum insured is not
your only threat—an inadequate indemnity
period may cause insurance payments to stop
before a business fully recovers after a loss.
This could leave your business half-recovered and
stagnant once the indemnity period on your insurance
The same applies to undervaluing your business’ revenue—if you choose a sum insured that does not accurately reflect your business’ revenue, you could receive only a fraction of
your losses under a business interruption policy.
Insurers can even void cover on the grounds of
misrepresentation or non-disclosure, such as
providing figures that incorrectly value the
property or underrepresent your revenue.
Being underinsured leaves your
business vulnerable to financial ruin. With weak, inadequate insurance cover, you
may need to close for an extended period of time—or even forever if your cover
fails to account for the total cost of returning to business.
Which Policies Are Most Often Underinsured?
Any commercial policy can be
underinsured, but insurers report that the
following are the most commonly underinsured
Buildings – Business owners
often only consider the market value of a
building and ignore the actual cost of
rebuilding. Failing to regularly reassess the
value of your property and adjust your policy
accordingly could lead to your business being
underinsured and consequently unprepared for
even the smallest losses.
Machinery and plant –
A frequently updated list of all machinery and plant is the best way to ensure
it will all be covered when making a claim. Reflect any changes in your
machinery and plant by adjusting your sum insured.
– The inability to maintain business operations in the wake of a crisis can be devastating.
Possessing a current continuity plan and the insurance payout to cover it are
Cyber liability – Data
breaches are an increasing threat to businesses of any size. Improving your cyber
security and developing an action plan are now necessary business practises to
offset the potentially huge losses of a data breach.
How Can I Avoid Being
You can prevent your business from
being underinsured by accomplishing the following:
Provide the cost of
rebuilding the property (including the costs of demolition, materials and professional
fees) to your insurer rather than the market value or the amount you purchased
Calculate and use
your actual total revenue.
accurate valuations of your business and property.
appropriate indemnity period that allows your business enough time to recover.
Review your policy
wording to ensure you have the broadest cover possible.
Increase your sum
insured to reflect inflation.
Complete Your Cover
Your business is your lifeblood,
and you should do everything you can to protect it—this includes properly insuring
it against any possible damage. T.H. March is here to help you review your
policies and to ensure that you are covered for any type of claim.