Inflation rates are at record highs in developed economies around the world and are not only devaluing the dollar, but also potentially reducing the cover your insurance provides. There are a number of reasons why claims payouts could fall short of expectations so it's important for businesses to understand the impact and how to respond.

A combination of pandemic lockdowns, supply chain delays, energy supply interruptions and employment shortages at all levels have boosted the value of many commodities, trapped freight movements in bottlenecks and pushed out timelines for completion of services ranging from infrastructure development to legal matters.

Taking these price spikes into account, replacement values for physical assets such as goods in transit, plant and equipment, property, and fleet vehicles may be considerably higher than their insured estimates based on calculations made using bookkeeping formulas or the original ticket price.

Businesses shipping and storing commodities such as oil, gas, metals, and agricultural products may be particularly exposed to the risk of underinsurance, but any business that deals with physical assets could be affected in some way.

You can expect claim handling costs to be higher as well, especially if lawyers are involved since their fees reflect inflationary impacts.

Beyond this, if you are forced to suspend operations during repairs to your business property, the business interruption indemnity period may not be adequate, leaving you to 'pick up the tab' for the overrun in time. This could be months due to delays in the availability of materials and skilled labour, both of which may cost more than originally estimated in the terms of the sums insured under your insurance policy.

Factors that may impact the sums insured on your business insurance

Key considerations for estimating property damage reinstatement include

  • availability and costs of products and materials
  • delays in transport and delivery
  • inflated costs due to limited fuel and energy supply
  • availability and costs of skilled labour
  • lack of competition fuelling labour costs.

Key considerations for business interruption indemnity period include

  • impacts of inflation on running cost overheads
  • availability of skilled labour and materials for reinstatement
  • impacts of supply chains delays and labour shortages.

Key considerations for liability claims include

  • damages and settlements are broadly increasing
  • claims are becoming more complex (eg psychological injuries) and taking longer
  • legal defence costs are increasing to reflect other effects of inflation.

Business insurance policy items to scrutinise

While previously you may have reviewed your business insurance cover once a year at renewal time — or simply allowed it to roll over — in periods of economic inflation it may make sense to check the terms of your insurance cover with your insurance broker more regularly and revise your sums insured to reflect the current reality.

Here are some key insurance contract terms to be aware of as you review your cover.

  • Co-insurance/underinsurance — means if your sums insured are below the value of reinstatement at the commencement of your insurance period you may be liable for the difference.
  • Declared value — your assessment of the cost of reinstating the insured property at the time you take out or update your property cover. This amount should include professional fees, debris removal, compliance with updated regulations and environmental, social and governance considerations.
  • Average — refers to the payout in the case of underinsurance, which is restricted to the same proportion of the loss as the sum insured falls short of the total replacement value of the insured asset.
  • Day one reinstatement — protects against a shortfall in a claim payment by allowing for a capped percentage increase in reinstatement costs.
  • Exclusion — makes the insurer exempt in certain circumstances or for specified types of loss.

Next steps for addressing potential inflationary impacts on your insurance cover

Formulating a business continuity plan can contribute to identifying your primary risk exposures and the essentials required to ensure you survive a disruption or enforced closure. Bear in mind that claims are likely to take longer to resolve when determining appropriate deductible, aggregate and maximum indemnity period levels.

To ascertain property and asset replacement values your Gallagher broker can conduct a business property risk assessment or put you in touch with an independent third party specialist.

Your broker may also apply analytical tools to estimate policy limits and risk modelling to assist with deciding the optimum deductible level for your operations.

Disclaimer

Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.

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