What is Underinsurance?
Underinsurance is when you insure your property for less than the amount it would cost to reinstate it.
In the UK, around 90% of buildings are insured for the wrong amount and 8 out of 10 buildings are on average only insured for 60% of what they should be. Being underinsured like this will mean that if you are ever in the unfortunate position of having to make a claim, your insurer will not pay out the full value of your claim. This can be costly for businesses and for many, catastrophic.
CCRS Brokers have created a simple video to help explain underinsurance and what could happen if you have to make a claim. You can watch it here:
CCRS Underinsurance Explainer Video
Let’s say, for example, you have a commercial property that has been used by your business for several years, you perhaps had a valuation completed when you first insured it many years ago. Then, the unthinkable happens, a fire destroys the building. One of your first calls is to your broker or insurer and a Loss Adjustor is sent out to inspect the damage. This is when you find out that you are underinsured, you have only insured for 60% of the cost to reinstate the building.
You are told that it will cost £1,000,000 to rebuild but as you have only insured for 60%, your insurer will only cover £600,000 leaving you to find the remaining £400,000. For many businesses, this can be the difference between survival or collapse.
The Average Clause
Even in the case where there is only some minor damage to your property, the example above would still apply. In this case, the ‘average clause’ will kick in. The average clause is applied when your insurer has found your insurance value sum to be incorrect. It ensures that you don’t receive a full insurance claim payment when you have only paid part of the premium (compared to what would have been due had the correct full reinstatement value been insured for). Claims for partial losses will have their amounts proportionately reduced by the amount of underinsurance.
For example, a car crashed into your building and the total cost to repair is £10,000. If you have only insured for 60% of the total reinstatement cost, then your insurer would only pay out £6,000. Again, you would need to pay the remaining £4,000.
How to make sure you are not Underinsured
In the simplest of terms, you need to make sure you have insured for the right amount. You can do this by getting an up-to-date buildings valuation of all your properties from a qualified expert.
CCRS Brokers recommends that building valuations should be updated at least every 5 years.
Important! – You should insure for the cost to rebuild, not the market value. The cost to rebuild will include costs such as debris removal, professional fees (architects etc), labour and materials.
You should also:
- promptly notify your broker of any new purchases, changes to your property or disposals.
- Consider building in a buffer for the effects of inflation
- Increase contents values annually in line with inflation
How can CCRS Brokers Help?
CCRS Broker’s team of experts understand all too well the financial exposures associated with underinsurance and we work with all our clients to identify any possible issues.
Our unique risk assessment process can quickly uncover any issues you may be unaware of.
CCRS Brokers can also arrange for building valuations to be completed on your behalf by a team of qualified experts so you can have peace of mind that you have the correct level of cover in place.
Contact CCRS Brokers today to discuss your buildings insurance and how we can help you