The executive director of BIBA discusses the prevalent problem of insufficient insurance, and how to make sure your business isn’t put in a precarious position by underestimating the cover you require.
The whole purpose of insurance is to offer protection in respect of you, your assets and any liabilities you incur. However, it’s not enough for small businesses to simply treat buying insurance as a tick box exercise – click and it’s done, one less thing to worry about. Underinsurance can lead to a dangerous financial position for business owners.
In 2015 the insurance regulator, the Financial Conduct Authority, undertook a thematic review of insurance claims made by small and medium-sized enterprises. As a result it found that there were “a significant number of instances where the sum insured was insufficient to cover the loss”. In one case it identified, following serious fire, the sums insured for contents, buildings and business interruption amounted to only 25 per cent of the total cost of putting right the damage – a complete disaster for the business concerned.
So why does this happen?
Insurance companies price the cover they provide based on the amount of risk for that particular case. And, if after a claim, the amount actually at risk is found to be higher than the amounts declared as sums insured they can and do take the view that their customer has only paid for a proportion of the potential risk and deal with the claim in that proportion.
Think about a factory building that would cost £200,000 to rebuild. The owner of the factory decides that it will never need to be completely rebuilt – and selects only £100,000 as the sum insured. Unfortunately there is an electrical fault and the factory is completely destroyed. When the claim is investigated of course that sum is inadequate. The insurer, having received only 50 per cent of the premium required for the total amount at risk, only pays 50 per cent of the claim which is therefore only 25 per cent of the building value and the company is faced with a large bill to get back in its feet if indeed it can.
Obviously this is an extreme and a simplified example, but nevertheless it highlights two key points.
(1) Insurers need to charge a premium that equates to the true value at risk.
(2) The business insured needs to be able to assess the total value at risk of its buildings, stock, contents, gross profit and any liabilities they may incur.
For businesses it can be quite complex to even assess what needs to be covered and it is always worthwhile seeking advice from a professional insurance broker. A broker can discuss your business with you and identify areas that you may not have considered when calculating how much cover you might need.
- Do you routinely hold customers’ goods in your premises that should be included under your contents sum insured?
- How much money do you hold on site?
- If you are a contractor what is the value of your ongoing works and materials on site?
- Do you know how long it would take you to recover your trading position after a loss and how to calculate your business interruption sum insured?
- What liabilities might you incur?
- Are you a shop or restaurant with potential for many small trips and slips claims, or do you supply to high hazard trades such as aviation or medical with the potential for very large liability claims
This list is not exhaustive; you will need to take into account the nature of your business when deciding how much cover you need for your property and what limit of indemnity you need to cover potential liabilities, this where your insurance broker can help.
A lot to think about but worth the effort – in the event of a loss the last thing you want to be concerned with is whether your insurer will pay enough to get your business back on its feet.
Graeme Trudgill is the executive director of the British Insurance Brokers’ Association (BIBA).
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