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The hidden perils of underinsurance on Commercial and Residential Properties

November 2018

Unwittingly, many businesses are putting their most valuable assets at risk due to the continued increase in Building Costs over and above the cost of inflation. The cost of Building has risen by 77% since 2005, whilst the cumulative inflation over the same period is only 30%. This could result in your properties being severely underinsured.

Example : If your property was correctly insured for £200,000 in 2005, with indexation this would now be approximately £260,000. In the real world, with Building Cost Inflation over the same period, the ACTUAL rebuild cost should be £354,000. This would leave a deficit of £94,000 in the event of a total loss, even more when average is applied. Across many different market sectors and varying lines of business, underinsurance is rife and when a claim arises the impact can be disastrous. If sums insured are only 75% of what they should be, then insurers can apply that percentage to any claim. This ‘application of average’ can see underinsured businesses face a shortfall in their Insurance payout and leave them with an unexpected and often sizeable bill. The widespread nature of underinsurance in the property market was underlined by research carried out recently by the Building Cost Information Service, which is part of the Royal Institution of Chartered Surveyors. It found that 80% of commercial properties are underinsured.

In similar work, the Chartered Institute of Loss Adjusters found that 40% of business interruption policies are underinsured with the average shortfall being 45%. Changing values

In the property market, there is often confusion between the market value of a property and its rebuild cost. Costs for building materials and labour also change regularly and many businesses forget to include the fees for removing debris and clearing the site before a rebuild even starts.

Understanding the insurance in place is also essential and reinstatement cover will replace old for new while indemnity cover will pay out the market value of the plant and machinery at the time of the loss. As such, the difference between what a business thinks it is covered for and what it is actually covered for, can be significant. Carrying out valuations regularly will not always result in premiums going up and it is not unusual to find that the sums insured are too high and actually need to come down.

Even if the sums insured go up or indemnity periods are increased, the impact on the premium is often less than imagined.

For example, increasing a Loss of Rent indemnity period from 12 to 24 months does not simply double the premium and such widely held misconceptions are damaging to the market and the underlying security of the client. Once a loss has occurred, it is too late to avoid the negative impact of underinsurance and this is why it is so important to get the right sums insured at renewal.


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