In today’s unpredictable world, ensuring that your business is adequately protected is more important than ever. One of the most significant, yet often overlooked, risks which businesses face is property underinsurance. At first glance, underinsuring your property might seem like a cost-saving measure, but the reality is far from it. Underinsurance can leave your business vulnerable to catastrophic financial losses that could jeopardise its future.
What Is Property Underinsurance?
Property underinsurance occurs when the insured value of a property is less than its actual reinstatement cost. In other words, if your property were to suffer significant damage or be destroyed, the insurance payout you receive may not be sufficient to cover the full cost of rebuilding or repairs. This shortfall can arise from various factors, including inaccurate valuations, rising construction costs, or simply underestimating the value of your assets.
The Hidden Danger of the Average Clause
One of the critical mechanism’s insurers use to address underinsurance is the Average Clause. This clause effectively reduces the payout of a claim in proportion to the degree of underinsurance. For example, if you insure your property for £1,000,000 but the actual cost to reinstate it is £2,000,000, you will only receive half of your claim amount, minus any applicable excess. This could mean a £500,000 claim results in only £250,000 being paid out, leaving you to cover the remaining costs—an outcome that could severely impair your business’s ability to recover.
The Real Cost of Underinsurance
The impact of underinsurance on a business cannot be overstated. In the event of a significant property claim, being underinsured can lead to a devastating financial shortfall. For many small and medium-sized enterprises (SMEs), the reduced claim payout could be the difference between surviving a disaster and closing your doors for good. This risk is particularly pronounced given the current economic climate, where rising building costs, labour shortages and inflation are driving up the cost of reinstatement far beyond initial estimates.
Mitigating the Risk of Underinsurance
At Sustain Insurance Brokers, we understand the challenges businesses face in ensuring their properties are adequately insured. Some protections that can be put in place to mitigate the risk of underinsurance are:
- Buffer Against Underinsurance: Applying the Average Clause only if the declared value is less than 85% of the reinstatement value.
- Day One Provision: Covering up to 115% of the declared value at policy inception, providing an additional cushion against underinsurance.
Whilst these provisions offer some protection, they are not a substitute for an accurate valuation. We strongly recommend that all businesses undertake regular, professional valuations of their properties to ensure their insurance coverage reflects the true cost of reinstatement.
Protect Your Business with the Right Insurance
At Sustain Insurance Brokers, we are committed to helping our clients navigate these complex challenges, providing tailored insurance solutions that reflect the true value of your assets.
Don’t wait until it’s too late. Contact us today to review your property insurance and ensure your business is fully protected.
