The Hidden Risk of Underinsurance

Are your current sums insured adequate? Events over the last few years mean that we are seeing inflation at levels many of us have not seen in our lifetime. If your sums insured do not represent the full value of the property you are insuring, you may not receive the full amount in the event of a claim.

We’ve seen the holiday park industry experience many obstacles over the past two years. Prices of caravans have continued to rise and new units have become increasingly difficult to source, as supply chain problems continue to affect the supply of materials required to build them. This is only exacerbating the price issue.

How can this affect your insurance cover?

If you have hire fleet and sales stock insured on your park’s policy, it’s important to understand the potential impact of the increased costs of replacement. It is your responsibility to ensure that your sums insured are adequate, otherwise, in the event of a claim, deductions may apply due to underinsurance.

What is underinsurance?

Put simply, underinsurance is when a policyholder has inadequate insurance cover for their needs. In the event of a claim, this could mean a claim amount exceeding the maximum limit that can be settled by the insurance company. This could result in a shortfall for the policyholder, potentially leading to a serious financial loss for the business.

Here’s an example. If you insure the toilet block on your park for £50,000 but it costs £100,000 to rebuild or replace, then you have insured only 50% of the risk (in insurance terms you would be underinsured by £50,000, or 50%) and therefore chosen to insure the other 50% yourself. So if there are any claims you make (no matter the size) insurers may only pay their 50% and you will have to fund the remaining 50%.

In insurance terms this is known as the application of average, and it means you pay for a level of cover but you need to ensure that you ask for the correct amount of cover—if you don’t buy enough, it may not fully respond to a loss and you shall have to cover the amount you have chosen to self-insure.

What are the common areas of underinsurance?

The most common reasons for underinsurance in holiday parks we see typically fall within the following areas.

Stock, Hire Fleet/Contents: If you were to insure only part of the total value of your stock, hire fleet/contents on the basis that it is unlikely to suffer a 100% total loss of those items, you would be overlooking the fact that the total figure still needs to be known by an insurer. Policyholders may believe they can claim up to that limit, however, this is not necessarily the case. This is because the ‘average clause’ of a policy allows insurers to pay less if a policyholder has underestimated the declared value of stock/contents.

Claimants often assume the current or secondhand value will suffice in the event of a loss. You should check with your broker the basis of settlement i.e., reinstatement (new for old), or indemnity (market value). If you do not have new for old cover, your payout will likely be insufficient to replace the assets you are claiming for.

Buildings Insurance: Buildings should be insured for reinstatement cost, i.e., the cost to rebuild and replace your park buildings from absolute scratch. This can include costs such as labour, site clearance and professional fees. A valuation from the Royal Institution of Chartered Surveyors (RICS) is recommended to help you determine reinstatement cost.

Business Interruption: It can be easy to underestimate how long it would take for your business to get up and running again after an insured event. Often, a period of cover is far shorter than the actual period of disruption, leaving a park owner with ongoing losses after the insurer stops paying. To work properly, your policy requires a thorough and up-to-date assessment of the interruption exposure. This should include a business continuity plan that represents a true picture of the time and resources you need to achieve pre-loss turnover levels.

Inflation: Insuring for an outdated purchase price can prevent replacement for that same cost. Consider midterm fluctuations in material costs through inflation or market forces. Certain types of goods are more subject to market forces than others with some having the potential to increase in value significantly in a short space of time. Insured sums should ideally be automatically index-linked to inflation.

Insufficient Insurance Reviews: Failing to review historical sums insured at policy anniversary may lead to gaps in cover. Acquiring new plant and machinery, adding a new computer system, or increasing stock levels are not always quickly linked by customers to the need for an insurance conversation. It is best practice to undertake this annually in addition to discussing changes with your broker at your review meetings throughout the year.

How can you ensure all areas are covered?

We encourage you to regularly review your sums insured to take into account various changes and challenges that may affect your park, such as building work on-site, weather/climate-related risks, or an increase or decrease in stock. Use the key underinsurance risks we have outlined as a guide to help you assess whether your cover is adequate for each area of your business. If you have made significant changes to your assets, property, stock or business activities, let your broker know straight away—don’t wait until renewal.

Your customers should also be aware of the potential effect on their own insurance cover when replacing their caravan, so it’s important to have this conversation with them to help ensure they are adequately protected, too.

How Gallagher can help

Our specialist team can work closely with you to help ensure your business is sufficiently covered. We can support you with any gaps in cover, and then tailor a policy to suit your park—with bespoke policy wordings available to meet your specific requirements.

We also offer park surveys and valuations services, whereby we can provide buildings replacement sum insured values through our partnership with a RICS-approved company (with valuation reports supplied within 14 days of the survey).

If you would like to find out more, contact 01452 801700.