An Introduction to Underinsurance with Head of Claims, Jon Tyler
Underinsurance is, simply put, what happens when you have not taken out enough insurance cover to meet your needs. Underinsurance is a common problem, specifically in relation to the contents of a domestic or commercial property or for the property itself.
Recent research by The Building Cost Information Service found that UK commercial property underinsurance on policies is as high as 80%.
With this in mind, we spoke to Jon Tyler, Head of Claims, about the consequences of underinsurance and the steps you can take to mitigate against it.
What does underinsurance mean?
Underinsurance is pretty self-explanatory. It is when the level of insurance you carry is not adequate for the risk that you want insuring.
There are a range of potential consequences of being underinsured. Many commercial policies will carry what they call an ‘average clause’. This is just a very simple calculation that measures the proportionate reduction on a claim in the event of underinsurance.
In simple terms, if you are insured for £50,000 and you should be insured for £100,000, then you will get 50% of the claim paid.
In more extreme circumstances (and this ties in with the Insurance Act of 2015) if an insurer feels that, for whatever reason, there has been a deliberate attempt to underinsure, they can claim what is called misrepresentation and, in certain circumstances, they can refuse to deal with the claim entirely.
In very extreme circumstances, they could cancel the insurance policy.
Can you give us an example of a situation which that kind of misrepresentation would occur?
It can occur with any of the various types of insurance and for various reasons. For example, if you have insured your stock for £20,000, but the stock figures in the business accounts show the true value was £100,000, then that would suggest to an insurer there may be a deliberate attempt to underinsure. The reason for doing it is usually for a premium saving.
Sometimes this can be due to a mis-understanding on the part of the policyholder who maybe believes they only have to insure against the likely value of a claim, rather than against the worst case scenario.
For a building it is slightly different. Whilst the value of stock is relatively easy to know, finding the value of a building means arranging for a specialist service, a surveyor to come and do it for you.
There is therefore a greater possibility of an honest error in setting the rebuild value, whereas with the stock you know what the value is so there is not quite the ambiguity.
For those that are underinsured, what are the steps that you would suggest they take in order to protect yourself?
It’s all about knowledge. This is where insurance brokers can make a difference and add value, as they are able to explain to clients how they should insure and on what basis.
So let’s say you were looking at stock, we would explain how you should insure your raw materials, your work in progress and your finished stock because they are all slightly different in terms of the stage in the production process.
If it is plant and machinery, for example, you would judge how much it would cost you to go out and replace everything with new equipment if you lost it all overnight.
In terms of Business Interruption, which is perhaps the most complex one, there is a huge difference between an insurance rate of gross profit and an accounting rate of gross profit. Our job is to explain how this is calculated to our clients.
Talking specifically about underinsurance, is there a particular area of insurance that is more prevalent to being underinsured?
Buildings is the most common area, although you can be faced with an underinsurance issue on pretty much any element of business, apart from liability or what we call Professional Risks, Directors and Officers, Indemnity Guarantee, Employment Practices (the professional and financial risks).
Everything else, anything with tangible property can have a problem with underinsurance.
As a business you need to make the decision to ask ask a qualified surveyor or find a service through your local broker, for example the service we are offering to our clients: an RICS backed survey to say what your building is actually valued at.
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If you have concerns about being underinsured, please get in touch with us here.