Understanding underinsurance

The last thing you want to hear when you claim is that your insurance won’t cover your total loss. Or that your insurer is refusing to pay the full value of your claim. But that can be one of the very real and damaging consequences of underinsurance.

Being underinsured can mean your insurer decides to pay only a proportion of the sum you're claiming for. And before you climb on your moral high horse and decry all insurers as crooks, the bad news is...they're perfectly within their rights to do so.

What is underinsurance?

Underinsurance rears its troublesome head when a policy's level of cover is less than a claim's potential total value. The difference between the two means the person or business claiming is out of pocket from the start.

So, say you insure your office contents for £15,000 but, after a burglary, it turns out replacing all your kit will cost at least £20,000. You're down £5,000 already. Ouch.

Law of averages

Then there’s the ‘average rule’ insurers use to calculate claims. It means if you’re underinsured, they can reduce the amount they pay you by the same proportion you're underinsured.

In this case, that’s £15,000 worth of equipment cover minus 25% (£5,000) underinsured, so a total payout of only £11,250….£8,750 shy of the true replacement cost. Double ouch.

What causes underinsurance?

Underinsurance can happen when you undervalue the cost of all your kit (by only totting up your costliest items, for example). Or when you miss something off the list – like carpets, furniture, fixtures, fittings, or hired equipment.

It can also happen when you value your contents at the price you bought them. Remember, your level of cover should be enough to repair or replace all your equipment if it was wiped out today – from your smallest stapler to your most expensive objet d’art. So, sifting through old receipts won’t help.

Better, too, to overestimate how much your stuff's worth than find yourself short. If your cover includes stock, you might want wiggle room for seasonal stock increases. Same goes for any new equipment you buy, including non-tangible items like software programmes.

Once you’ve worked out the cost of everything – and we mean everything – you can choose the most appropriate level of cover for your business. And you’ll have the best chance of making sure you’re not left underinsured if you ever have to claim.

How else can I be underinsured?

Underinsurance goes beyond office equipment. Here’s where we see it most often:

• Property: you only insure for a building’s market price, not the re-build cost – which can be much more. With recent rises in the cost of building materials and labour, underinsurance is a big problem here. It’s estimated over 40% of UK commercial properties are underinsured, with an average shortfall of 43%.
• Professional indemnity: you haven't enough cover for the most expensive mistake you could make. Or for if a client sues you for the total value of a failed project – not just your part in it. You should also account for legal costs. They can run into many £ten (or even £hundreds) of thousands if a claim is complicated or drawn out.
• Business interruption: your workplace is out of action, but your cover isn’t enough to compensate you for your lost income and additional expenses in the time it takes you to get back on your feet.

What next?

Underinsurance can leave you seriously out of pocket. So it's important to regularly review your insurance and make sure you have enough cover – and not always just before your annual renewal.

We'd advise going through each of your policies and taking a realistic view on whether you have enough to allow for a worst-case scenario. Take your time working it out – better yet, keep a spreadsheet which you can update. If you keep any expensive artwork in your office, get it revalued every three to five years.

If you’re calculating the rebuild cost of a commercial property you own, it’s best to get a surveyor’s quote or speak to your mortgage lender. The Building Cost Information Service (BCIS) has a handy online calculator you can also use.

A risk not worth taking

Any pains you take when working out how much cover you should have are worth it. Because the consequences of underinsurance can be serious in two ways: leaving you unable to claim for your full loss, and making you susceptible to the average rule, reducing your claim further.

That's a double whammy that's difficult to swallow.

Read more on how not to be underinsured. Or call our team up 0345 222 5391 with any questions you'd like answered. We’ll be happy to help.

Image used under license from Shutterstock.