Astonishingly up to 80% of UK businesses and 75% of US businesses are currently underinsured, in fact a study last year from Aviva showed that 1 in 5 SMEs aren’t confident that they have the right level of insurance in place. Doug Kelley, Director for Bluedrop Services, specialist insurance brokers with in-depth knowledge and expertise in business insurance tells us that unfortunately if you are either intentionally or unintentionally underinsured by, for example 50%, then your provider will understandably only pay out 50% of the value of the claim. This is known as the ‘average clause’ and can be very costly particularly for an SME.
40% of businesses fail to re-open following disaster
With such a large percentage of businesses found to be underinsured it is not surprising that 40% of businesses end up not re-opening following disaster. Statistics from the United States Small Business Administration indicate that over 90 percent of businesses fail within two years after being struck by a disaster. Whilst it is something that most businesses think won’t affect them, it is actually something that affects many businesses.
Misconceptions can lead to underinsurance
It is also a common misconception that insurance awards and aid from government agencies will allow merchants to pick up the pieces after a flood, major earthquake, fire, or water damage. Often this is not the case as some types of disaster are not covered by the insurance in place, or even in instances where the government provide an award it may prove to be too little, too late.
In times of economic pressure it is hard to convince businesses of the need to take out a full portfolio of insurance, especially when they have not experienced a previous claim or understand the devastating effects of underinsurance. Can you really afford to suffer this cost?
So how can you avoid underinsurance?
1. Review costs on each renewal
Each time you renew your policy make sure that you re-evaluate the costs involved. As your business grows and develops, so too will the costs of getting your business back on track. A ‘capital additions’ clause will allow for around 10% of the overall insured sum to be added for additional purchases of equipment or office locations since the insurance was taken out. However, if any purchases exceed this amount you should notify your broker to add these to the policy.
2. Re-build value vs market value
To avoid underinsurance in this area you need to make sure you are insuring against the re-build value not the market value of the business. A true rebuild cost needs to include elements other than the main structure of the building such as surrounding roads, fencing, and car parks so that you are not left short. Don’t forget that you also need to factor in the cost for demolishing the entire remaining structure, site clearance, planning, architects, and surveyors before the rebuild even takes place.
3. Machinery, plant and stock considerations
The lead times for bespoke machinery that your business requires may be longer than anticipated, particularly if they need to come from overseas. Maintain an up-to-date register of all your machinery, plant and contents to make sure that you are fully covered. The value of stock on a balance sheet may not truly reflect the cost of replacement, especially if they have depreciated.
Reinstatement cover will replace old for new, whereas indemnity cover will only pay out the value at the time of the loss. This is something you can consider if you are willing to replace items second-hand. Discuss your options with a trusted insurance broker.
4. Don’t underestimate business Interruption
Business interruption can be hard to estimate. A standard estimate is 12 months but often this is found to be too short a period. You need to take into account business growth and competitor activity.
A ‘Declaration Linked Basis’ can allow an estimate of the likely gross profit to be given at the renewal which can be confirmed once the actual figures are available.
5. Calculate gross profit correctly
Accountants tend to show gross profit after the deduction of purchases and would strip out staff and utility costs. For insurance purposes you need to include these items to avoid any unpleasant surprises.