Avoiding Under-Insurance

  • 40% of businesses do not have enough business interruption cover to get them back on their feet following a large claim

  • In 25% of SME claims reviewed by the FCA, the indemnity period expired before they returned to a normal trading position

If you find out at the time of making a claim that the policy you have bought does not provide enough cover it can have a devastating effect on your business. If at the time of the claim the Insurer discovers that you have undervalued your insurable interest then they may charge more premium at that point, or worse still significantly reduce the claim payment made to you.

There are many ways in which a business can be under-insured; buildings, contents, business interruption, liability etc. so it is vital that you complete a thorough search for information about your business before taking out an insurance policy to ensure you are sufficiently covered.

Suitable insurance forms a vital part of business continuity planning so it is essential to ensure you are buying the right amount of cover. Generally speaking, insurance companies base their premiums on the value of what the client is asking to be insured. The purpose of an insurance policy is to put you back in the position you were in before you needed to make a claim, and that can only be done if you have stated that position accurately to your insurer.

Under the Insurance Act 2015 the responsibility has been placed on the Client to make a reasonable search for information about the business to allow the Insurer to know the business in its widest sense. This means that it has become even more important for a business owner to provide as much precise information as they can when getting quotes for their insurance.

So how can you ensure that you have adequate cover?

It is essential to correctly assess the amount of insurance cover you need and to understand how to arrive at a suitable sum insured or liability limit of indemnity, and it is equally important to fully understand what they represent. The Insurance Act states that you must conduct a reasonable search for information when acquiring an insurance quotation, and this could require you to obtain or verify information from a number of sources who may hold or have access to important information about your business. For example; if you employ an accountant it may be worth checking with them before declaring an amount to insure in regards to your annual turnover, or consulting with a surveyor in regards to your building sum insured and how long a rebuild would take. You should obtain up to date valuations where possible and keep sums insured under review from year to year. It is also important to remember that policy standard limits are not always enough.

Rebuild Costs

The rebuild cost may be higher if you have a specialised property, such as a listed building. This could also increase the time it would take to rebuild your property if specific construction materials need to be sourced, so you should take this into consideration when deciding on your indemnity period for business interruption.

Business Interruption

When considering your business interruption the sum insured needs to represent the expected revenue over the period of time it would take to get your business back to its pre-claim trading level. This means that it is important to correctly asses both the sum insured and the indemnity period. It is wise to be as pessimistic as possible when considering how long it will take to get your business back up and running again after a total loss event as building work inevitably takes longer than planned and so the process of getting you back to a trading level can be out of your hands. Make sure you give yourself some breathing room when considering your business interruption.

Liability Cover

Liability policies are intended to pay the costs of defending an allegation of legal liability against your business together with any settlement or award of damages. To work out the liability risk for your business you need to consider any potential claims that might be brought against you or your business. These type of claims can come from many types of claimant – service users, their family members, staff, local authorities etc. so it is important to consider all of these and what type of claim they could bring against you. As an employer you will have a legal obligation to have at least £5 million of employers liability cover. It is also worth considering more specialist covers such as management liability, directors and officers cover, cyber insurance and professional indemnity insurance.

As well as ensuring you have enough liability cover, it is important to ensure you have the right kind of liability cover. Some insurers are now offering liability cover on a claims made basis, which may not provide sufficient cover for the care industry due to the nature of how claims are usually reported within the industry. I have written about this in much more detail here:

http://www.aldium4care.co.uk/what-to-look-for-in-care-home-insurance/

Top Tips

  • Use professional valuation services to help you decide on your sums insured.
  • Sums insured for buildings should be based on the cost of rebuilding, not the market value.
  • Particular features of your building might affect the cost of reconstruction.
  • 24 months is likely to be the minimum period required for a business to fully recover its trading level and to rebuild its customer base.
  • Disaster recovery or business continuity plans will significantly speed up the recovery period after a loss.
  • If you buy a “standard policy” check that all of the limits and indemnity periods are sufficient.
  • Make sure that you have considered the full risk and potential consequences of liability claims against you.
  • Check all of your documentation thoroughly. If there’s something you don’t understand or is unclear, which can often be the case with insurance jargon, then ask your broker to explain it to you (it’s what you pay us for!).

ALDIUM offer a bespoke insurance programme, designed and written to your exact demands and needs. Our specialist care consultants and underwriters are here to ensure you have the cover you need to make sure your business is fully protected when it is at its most vulnerable. If you are unsure if you currently have adequate cover for your business, or would like some advice around how best to find out what cover is required then call the Care Team at ALDIUM on 0151 336 5881 or email us at care@aldium.co.uk