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PROVIDED BY T H MARCH - THE COST OF INSURANCE
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matter. The content should not, therefore, be regarded asconstituting legal advice and not be relied upon as such. In relation to anyparticular problem which they may have, readers are advised to
seek specific advice. Further, the law may have changed sincefirst publication and the reader is cautioned accordingly. © 2015 Zywave, Inc.All rights reserved.
Many businesses risk their own survivalby unwittingly remaining underinsured. Follow these tips to ensure yourbusiness has the proper cover to defend against disaster.
The Dangers of Being Underinsured Manybusinesses, regardless of industry, are risking theirown survival by unwittingly remaining underinsured.The problem is widespread and perennial, and acataclysmic event can strike at any moment, leavingbusinesses vulnerable to complete destruction.
A 2012 survey from the BuildingCost Information Service found that 80 per cent of commercial properties in theUnited Kingdom were underinsured. An October 2014 survey of small- andmedium-sized businesses in the UK found that about 62 per cent of respondentswere underinsured due to a lack of business interruption insurance or becausethey did not even know if this type of cover was included in their businessinsurance policy.
You may only find out that yourbusiness is underinsured when you experience a major loss event, such as a databreach, flood or fire, and need to make a claim. Be proactive and know yourstatus now so you can fix that gap and be prepared for anything.
What Does It Mean toBe Underinsured?
If your business is underinsured,it means that you possess policies but yourassets are valued and insured at less thantheir true value, leaving your business inadequatelyprotected. Therefore, in the event of a disaster,you would be compensated for less than the truevalue. A shortfall in your insurance payout could ruin your organisation.
Businesses can be underinsured for many reasons.
Often it is because businessowners think that a major loss event will never happen to them, so they do not needcomprehensive protection. But inclement weather, a cyber-security hack or adestructive fire can impact and destroy any business. Business owners may failto review their cover and leave sums insured and estimates untouched for years,despite major changes at their organisation such as additional employees, newequipment or recent construction. And because buildings and content are typicallyinsured for their reinstatement value (how much it costs to rebuild),neglecting to habitually update your sum insured could mean you are only insuredfor the initial market value (the price of the property when you bought it) andthus, you would only
be partially covered by yourpolicy for rebuilding costs in the event of a partial or total loss.
Sometimes business owners chooseto underestimate building costs and remain underinsured simply because theywant to save money on their insurance premiums. But the short-term savings cannever compensate for the out-of-pocket payments required to complement yourinsurance payout in the event of an insured disaster.
There are many different reasonsbusinesses find themselves with inadequate insurance cover—but the mostimportant thing is to recognise when your business is underinsured, tounderstand the attendant risks and to take action that increases your cover.
The Dangers of BeingUnderinsured
What Is the Danger of Being Underinsured?
Being underinsured threatens abusiness’ entire survival. A single lossevent, no matter how trivial, can bedisastrous if a business is underinsured and thus receives an insurance payout following the loss that isinsufficient to return the business to its pre-lossposition.
But a meagre sum insured is notyour only threat—an inadequate indemnityperiod may cause insurance payments to stopbefore a business fully recovers after a loss.This could leave your business half-recovered andstagnant once the indemnity period on your insurancepolicy expires.
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 ofyour losses under a business interruption policy.Insurers can even void cover on the grounds ofmisrepresentation or non-disclosure, such asproviding figures that incorrectly value theproperty or underrepresent your revenue.
Being underinsured leaves yourbusiness vulnerable to financial ruin. With weak, inadequate insurance cover, youmay need to close for an extended period of time—or even forever if your coverfails to account for the total cost of returning to business.
Which Policies Are Most Often Underinsured?
Any commercial policy can beunderinsured, but insurers report that thefollowing are the most commonly underinsuredpolicies:
Buildings – Business ownersoften only consider the market value of abuilding and ignore the actual cost ofrebuilding. Failing to regularly reassess thevalue of your property and adjust your policyaccordingly could lead to your business beingunderinsured and consequently unprepared foreven the smallest losses.
Machinery and plant –A frequently updated list of all machinery and plant is the best way to ensureit will all be covered when making a claim. Reflect any changes in yourmachinery and plant by adjusting your sum insured.
Business interruption– 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 areessential.
Cyber liability – Databreaches are an increasing threat to businesses of any size. Improving your cybersecurity and developing an action plan are now necessary business practises tooffset the potentially huge losses of a data breach.
How Can I Avoid BeingUnderinsured?
You can prevent your business frombeing underinsured by accomplishing the following:
? Provide the cost ofrebuilding the property (including the costs of demolition, materials and professionalfees) to your insurer rather than the market value or the amount you purchasedit for.
? Calculate and useyour actual total revenue.
? Conduct regular,accurate valuations of your business and property.
? Determine anappropriate indemnity period that allows your business enough time to recover.
? Review your policywording to ensure you have the broadest cover possible.
? Increase your suminsured to reflect inflation.
Complete Your Cover
Your business is your lifeblood,and you should do everything you can to protect it—this includes properly insuringit against any possible damage. T.H. March is here to help you review yourpolicies and to ensure that you are covered for any type of claim.