An analysis of the most pressing concerns based on insights from 1,000 UK business leaders.
12 November 2024
Insights
The team began by explaining what underinsurance is and how it occurs. Underinsurance happens when a policyholder has inadequate insurance coverage to fully protect their assets. For example, many residential and commercial property owners are unaware that their properties are underinsured. As a result, in the event of a claim, they may receive less compensation than the actual loss, forcing them to cover the difference out of pocket.
Several factors contribute to underinsurance, including:
- Outdated, estimated or incorrectly calculated valuations.
- Inflation causes a mismatch between rising costs and static coverage limits.
- Insufficient limits in the insurance policy.
- Business interruption coverage and financial projections fall short of actual income loss.
- Delays with acquiring materials, the availability and cost of raw materials, contractors, and equipment, combined with extended planning procedures.
- Policyholder oversight or intentionally inaccurate sums insured declarations increase the risk of financial loss and potentially void insurance cover.
Properties most likely to be underinsured
Underinsurance can affect all types of properties for several reasons; however, recent research suggests that certain types of properties are more likely to be underinsured, including1:
- Sports / Recreation centres.
- Hospices.
- Public houses / licensed premises / hotels.
- Nursing homes / care homes.
- Golf clubhouses.
- Vehicle showrooms.
- Youth clubs / nursery schools.
- Undertakers.
- Retail warehouses.
- Dentist surgeries.
Did you know… 76% of UK properties are underinsured.2
The consequences of being underinsured
Underinsurance can have severe financial ramifications for property owners, exposing them to considerable losses in the event of a claim. Here are some problems underinsurance can cause:
- Significant business interruption: Without adequate funds, it may take longer for a business to restore normalcy, resulting in extended downtime and potential loss of clients, revenue and market share.
- Prolonged unavailability of buildings, machinery or plant: In industries where specialised equipment is essential, like manufacturing or hospitality, the unavailability of key machinery or facilities can be particularly damaging, leading to an extended interruption of operations.
- Lack of funds to complete the rebuild or the requirement to borrow: Inadequate insurance coverage might not be enough to cover the entire cost of a rebuild. This creates a funding gap, forcing property owners to either halt the rebuild or seek additional financing.
- Exposure to potential legal action for inadequate levels of cover: Underinsured businesses might be exposed to legal action, especially if clients, partners or tenants are affected by the underinsurance. In some cases, failure to maintain adequate cover can constitute a breach of contract, leading to lawsuits and penalties.
- Complex and extended negotiations with insurers: Without adequate coverage, the policyholder may have to negotiate over the value of the claim, leading to extended disputes and delays in receiving any settlement. This process can drain resources and distract management from core business activities.
What is the 'Average Clause'?
The Average Clause is a lesser-known condition of building insurance when a policyholder has under-valued the rebuild cost and made an insurance claim. The clause states that the policyholder must bear a proportion of any loss where assets were insured for less than their full replacement value. In this scenario, the insurer can reduce the settlement by the same percentage if the asset is underinsured.
The clause can be relevant to various types of material damage insurance, which may encompass coverage for buildings, contents, plants, machinery and business interruption. The specific terms and conditions outlined in your insurance policy will determine the applicability of the Average Clause.
For example, if your material damage insurance coverage falls short of the total reinstatement cost and you need to file a claim, the payout may not fully meet your needs, regardless of the claim's size. This is because the percentage you are underinsured by can be deducted from your payout under the Average Clause in the policy.
Did you know… 67% of claims managers have been forced to reduce or reject claims in the last year due to underinsurance.
How to combat underinsurance
There are several proactive strategies that property owners can implement to address underinsurance:
- Regular valuations: Engage with qualified valuers to conduct regular assessments and ensure that the material damage insurance coverage aligns with its current replacement cost.
- Work with specialists: Experienced insurance brokers can guide property owners to secure coverage accounting for specific risks and the full replacement value.
- Inflation adjustments: Factoring inflation adjustments into insurance policies can help maintain adequate coverage as construction and material costs rise over time.
- Transparent communication: Keep an open line of communication with insurers about any changes to the property, ensuring these factors are considered in the coverage.
How Gallagher can help
Every business has unique risks attached, and it requires expertise, proactive planning and custom solutions to address underinsurance concerns. Gallagher has a team of in-house specialists and third-party providers who offer desktop and on-site reinstatement cost assessments for your assets.
In the event of a claim, our in-house Business Assist team will work closely with you to help you maximise your chances of success. We also offer business continuity planning advice to protect your business stability in the event of disruption.
Watch the on-demand webinar here and book your initial underinsurance discovery call on 0800 138 7538 or contact your Gallagher representative to safeguard your property assets and secure the future of your business.
