News Article

What happens if you're underinsured?

The very real and damaging consequences of underinsurance is that your insurer refuses to pay the full value of your claim and decides to pay only a proportion of the sum that you're claiming for.

This is last thing you want to hear when something has gone pear-shaped and there is a real possibility you will be faced with a big shortfall or having to close down your business.

So what do we mean by underinsurance?

Underinsurance occurs when your policy's level of cover is less than a claim's potential total value.  For example, if you have equipment in your business that you insure for £20,000, but, after an incident (such as a burglary) it turns out that to replace your valuable equipment is £25,000 then you will find yourself to be underinsured by £5,000 a not insignificant 20%

In this instance your insurer is perfectly within their rights to decide to apply the average rule to your claim.

What is the Average Rule?

The ‘average rule’ that insurers use to calculate claims means if you’re underinsured, they can reduce the amount they pay you by the same proportion you're underinsured.

In the above example 20% is £4,000 that can be deducted from the £20,000 that you were expecting.

So instead of a claim settlement figure of £20,000 your insurer may apply the average rule and pay you only £16,000 – leaving you with a £9,000 shortfall to find elsewhere!

Some examples of how you can be underinsured

Unused equipment
That equipment in the corner of your business premises that you no longer use or insure may be taken into consideration at the time you make a claim for loss or damage to other equipment.

Not declaring the combined cost of all your portable business equipment
Say you use equipment offsite but you only cover your most expensive combination that you think you’re likely to have with you at any one time.
If you have similar equipment stored elsewhere that you can use offsite as well, it means you’re underinsured.

Property
It is a common misunderstanding to insure business premises for the market price. This is potentially a sizeable loss for your company as the rebuild price can be substantially more than the market value.

Professional indemnity
Not having enough cover for the most expensive mistake you could make, or for the possibility that a client sues you for the total value of a failed project – not just your part in it.

What steps can you take to avoid underinsurance?
You should carry out regular reviews and audits of your insurance cover at renewal and when there are changes in your business or external factors that affect your business. 

This can be quite a daunting responsibility which is where an insurance broker can help.

An insurance broker will check your cover and risks and make recommendations for protecting your business against worse case scenarios. And they are on hand during the year if you need expert advice, have any questions, want to make some changes or find yourself needing to make a claim.

For more information about underinsurance or our other products call Nigel Kennedy on 01686 626019.

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