What is Under-Insurance?
Under-insurance is fraught with danger!
Making an insurance claim should be a relatively easy process. That is, unless your level of insurance cover is inadequate or non-existent. Under-insurance happens when you’ve taken out insufficient insurance to cover costs when something goes wrong.
If you don’t have the right level of insurance cover, you could find yourself in financial stress or even risk losing your business.
Business owner’s often under value the expert advice of a qualified and experienced insurance broker but an important part of an insurance broker’s job is to understand their client’s business, identify the risks their client’s face and recommend a tailored insurance program to help transfer risk to an insurer.
But it doesn’t stop there. An insurance broker and their client need to communicate regularly and review the insurance program to ensure it’s up to date and meets the client’s changing situation and needs.
When business owners purchase their insurance direct with insurance companies, they often don’t receive expert and tailored advice to make an informed decision, resulting in inadequate or incorrect cover which is fraught with danger.
Here are some common examples where you could find yourself under-insured:
- Under estimating the replacement cost of a building
- No or insufficient cover for removal of debris costs
- No or insufficient cover for increased costs and inflation
- Under estimating or not taking into consideration heritage or council preservation orders
- Not including architectural and engineering fees in a building sum insured
- No or insufficient cover for replacing contents, stock, plant and machinery
- Not reviewing and increasing sums insured at least annually
- Failing to include business interruption cover or at least Additional Increase Costs of Working (AICOW) cover
- Setting an inadequate business interruption indemnity period
- Not adhering to the duty of disclosure requirement
Business owners need to understand the impacts that under-insurance can have on their businesses because under-insuring can cost you financially and even worse, mean the end of your business.
Many insurance policies include an ‘Average’ or ‘Co-Insurance’ clause (also known as the ‘under-insurance’ clause) which means if you insure for less than the full value of the property, a claim can be reduced in proportion to the amount of the under-insurance.
An example of the ‘Average’/’Co-Insurance’ clause being applied is shown below:
Full Replacement Value = $1,000,000
Sum Insured = $500,000
(Therefore, you would be self-insured for 50% of the full value)
Amount of example insurance claim = $100,000
Amount payable by the insurer as a result of the application of the ‘Average’/’Co-Insurance’ clause (ie. 50%) = $50,000
Some business interruption insurance policies also include an ‘Average’ or ‘Co-Insurance’ clause but the calculation is different.
For more information about these clauses and under-insurance, speak to one our insurance experts today.
SUREWiSE has access to leading industry tools and calculators which can be of great benefit to you, your business and your insurance program. At the end of the day, your decision not to seek our advice could cost you when you try to make a claim.
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