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Summer / Autumn 2019 Opportunity Articles

How Being Underinsured Could Threaten your Business

By David Collins, Client Services Director, Pound Gates

Your business is your lifeblood, and as new opportunities enable growth, you should do everything you can to protect it. Yet, many are risking their own survival by unwittingly remaining underinsured.

You may only find out that your business is underinsured when you experience a major loss event and need to make a claim. So, being proactive and knowing your status now can help fix any gaps and mean you are prepared if a future crisis strikes.

What does it mean to be underinsured?

•  Your assets are valued and insured at less than their true value. In the event of a disaster, you would not be adequately compensated.

•  You haven’t updated your insurance to reflect the growth of your business. For instance, if you have had construction undertaken and haven’t revised your buildings and contents insurance, then your policies will only pay out for the initial market value (the price of the property when you bought it), rather than the reinstatement value (how much it costs to rebuild).

•  You have no support to manage the impact of a major loss event such as inclement weather, a cyber-security hack or a destructive fire on your trading operations, and this could destroy your business.

What is the danger of being underinsured?

A single loss event, no matter how trivial, can be disastrous if a business is underinsured and subsequently receives an insurance pay out that is insufficient to return the business to its pre-loss position.

However, this is not your only threat. An inadequate indemnity period may cause insurance payments to stop before a business fully recovers after a loss. This could leave your business half-recovered and stagnant once the indemnity period on your insurance policy expires.

The same applies to undervaluing your business’ revenue. If you choose a sum insured that does not accurately reflect this, you could receive only a fraction of your losses under a business interruption policy.

With weak, inadequate insurance cover, you may need to close for an extended period, or for good if your cover fails to account for the total cost of returning to business.

Which policies are most often underinsured?

Any commercial policy can be underinsured, but the four most common areas are: buildings, machinery and plant, business interruption and cyber-risk.

How can I avoid being underinsured?

By taking the following steps:

•  Provide the total cost of rebuilding the property (including demolition, materials and professional fees) to your insurer, rather than the market value or the amount you purchased it for.

•  Calculate and use your actual total revenue.

•  Conduct regular, accurate valuations of your business and property.

•  Determine an appropriate indemnity period that allows your business enough time to recover.

•  Review your policy wording to ensure you have the broadest cover possible.

•  Increase your sum insured to reflect inflation.

Above all, it’s important to recognise when your business is underinsured, understand the risk and take action to increase your cover.

David Collins is Clients Services Director at Pound Gates. For advice and guidance contact Pound Gates on T: 01473 346046 or visit poundgates.com Twitter@poundgates

Sue Wilcock