Underinsurance in Commercial property

What is underinsurance?

Underinsurance is a term used when a policyholder insures property for less than its true value. The consequences can be devastating, both financially and emotionally.

Many policies have an average condition so where underinsurance exists, in the event of a claim the insurer may only pay a proportion of the claim because they didn’t collect a premium to cover the full value at risk. The policyholder is deemed to be self-insured for the balance.

If for example you insured a building for £100,000 but the true value is £200,000 and you suffer a £40,000 loss, you have only paid a premium for 50% of the value at risk. So in this example the insurer will pay just £20,000, or 50% of the claim.

Why is underinsurance so common?

  • Lack of understanding of what the declared values and sums insured must represent
  • Underestimating the value and not considering factors such as inflation, debris removal costs or seasonal increases
  • Confusing reinstatement value with market value
  • Misconception that underinsurance is only a risk if there is a total loss
  • A reluctance to spend money on a professional valuation to establish the true value
  • Financial pressures to cut back on insurance costs (false economy)
  • Failure of an insurance advisor to clearly explain what a declared value or sum insured must represent

It’s important to understand the basis of cover provided and ensure the insured values fully represent the policy wording definitions of insured property such as ‘buildings,’ ‘machinery,’ and ‘stock’. For example, it is common for the definition of buildings to include yards and car parks, so allowances need to be included for these.

Underinsurance isn’t restricted to commercial property though. Inadequate levels of protection can arise in many areas of insurance protection such as Business Interruption, Cyber insurance, Professional Indemnity, Public, Product and Employers’ Liability to name but a few.

Whose responsibility is it to avoid underinsurance?

It is the client’s responsibility to ensure values are accurate and it forms part of their duty under the Insurance Act 2015 to make a fair presentation of the risks. If any underinsurance is found to be deliberate or reckless, an insurer may have the right to void a policy due to the breach of this duty.

Hayes Parsons Insurance Brokers

Hayes Parsons is an independent, Chartered insurance broker with a vast range of knowledge in sourcing bespoke insurance solutions for businesses as well as offering risk management advice. The team at Hayes Parsons are available to help you with any queries you may have and are happy to discuss your current insurance arrangements either over the phone, zoom or in person at your premises so please don’t hesitate to contact us.