The leading causes of underinsurance and how to fix it
No matter how bright the future looks for your business, you never know when disaster will strike. Whether it be a flood or destructive building fire, underinsurance can be a problem. It is vital to have proper insurance policies to protect your business from any interruptions—especially if you are a SME with minimal financial flexibility. As a result, many businesses purchase business interruption (BI) policies for peace of mind in the event of unexpected disaster.
However, what happens when your BI policy fails to cover the entirety of your company’s financial loss? Unfortunately, this scenario is a common occurrence for businesses across the UK. The Chartered Institute of Loss Adjusters (CILA) found in recent research that 43% of BI policies are underinsured by an average of 53%. The following list contains the leading causes for BI underinsurance, as well as tips to remedy the problem:
Insufficient indemnity periods—Approximately 75% of BI policies have an indemnity period of 12 months, according to industry research. However, one year is usually an unrealistic expectation for a business to have fully recovered after a disaster. To combat this issue, be sure to calculate and set a realistic indemnity period that gives your business an appropriate time span to reach financial stability. This period typically falls between 18 and 24 months.
Inadequate sums insured for BI policies—Often, inadequate insurance sums for BI policies stem from outdated, roughly estimated or altogether incorrect valuations on commercial properties. It is important that you think about rebuild costs when calculating your BI policy. In addition, complete an annual review of your policy with us to ensure the accuracy of your valuation as your business (and your property) develops and changes throughout the years.
Failure to include wages in the gross profit calculation—In the CILA survey, 2 out of 5 respondents listed inconsistent definitions of gross profit as the primary cause of BI underinsurance. The average definition tends to exclude staff wages and utility costs, while for insurance purposes, those are crucial to calculating an appropriate gross profit. Make sure your gross profit calculation is accurate by including staff and utility costs.
To review the risk of underinsurance faced by your business please get in touch with Lockyers – we’re here to help.