Biz Extra

Published: January 15, 2023 | Updated: 16th January 2023
With inflation at a 41 year high, underinsurance is a growing concern that can affect any organisation, and you may not know you are underinsured until you need to make a claim, writes Matt Williams.
There are some common areas to look out for an underinsurance risk in your business.
Could your business afford to meet a substantial shortfall if an insurance pay-out turned out to be lower than expected? Current market conditions and supply chain challenges are adding to the issue, and as your business continues to operate and evolve in these conditions, your insurance may need to be reviewed to keep pace.
In many cases, underinsurance happens when valuations are out of date, roughly estimated, or incorrectly calculated. In the event of a claim on the policy, it could mean the claim amount exceeds the maximum limit that can be settled by the insurer—potentially leading to significant financial repercussions for your business.
Here are the key areas of underinsurance to watch out for:
Property: Out of date or inaccurate asset valuations can have negative implications for your cover. If your insurance doesn’t cover the total cost of rebuilding (the reinstatement value), and you needed to make a claim, you may not get the pay-out you were expecting, whatever the size of the claim.
Stock and contents: If the amount you state doesn’t accurately reflect the cost of replacing all your contents and stock on a new-for-old basis, this will count as underinsurance. Likewise, if supply chain issues have led you to stockpile some materials or components, your stock sum insured should reflect the increased value of materials you are holding.
Plant, machinery and equipment: Even if your machinery is not the most up to date on the market, or if a certain piece of equipment is not frequently used, taking the ‘new for old’ approach will help to avoid underinsurance and limit business interruption should a machine break down or become damaged.
Business interruption: Do you know how long it would really take your business to recover from a business interruption event? We’ve seen businesses select a period of cover which is much shorter than the actual period of disruption, leaving the business financially vulnerable. It’s important to get a true picture of the time and resources your business needs to achieve pre-loss turnover levels, including replacing any specialist equipment.
Cyber liability: Cyber-attacks are ever present, with 39% of businesses reporting a cyber-attack in 2021. Specialist cyber insurance can be vital to help protect your data, finances and reputation—particularly as many employees are now working remotely, which can heighten your company’s cyber risk.
Supply chain: Have you named all of your key suppliers in your business interruption policy? Supply chain issues are becoming more prevalent, a single supplier’s setback to collapse the remainder of your chain and cause serious financial issues.
The importance of an insurance review
If you have made significant changes to your property, assets, stock or business activities, or you think your coverage may be out of date, let your broker know straight away—don’t wait until renewal. When it comes to renewal, a thorough audit and review of your business can close cover gaps and ensure you have up to date, adequate protection in place. Discovering you’re underinsured at the point of making a claim could be catastrophic for your business.
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Gallagher is holding a webinar on this subject on Thursday, February 2.
It’s available to all.
Click here for more details.
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The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
Arthur J. Gallagher Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: Spectrum Building, 7th Floor, 55 Blythswood Street, Glasgow, G2 7AT. Registered in Scotland. Company Number: SC108909.