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Focus on Underinsurance and Adequate Business Interruption Insurance

Underinsurance – Have you considered the risk?

It’s been a year of tumultuous news, from the unexpected death of David Bowie, the rise and fall – and rise again – of Boris Johnson, and most recently the election of Donald Trump as the 45th President of the United States. Amidst such turmoil, however, it should come as no surprise that the event that will have the most pressing consequences for Towergate clients at several levels will be the decision to exit the European Union.

Granted, specific details of legislative and political consequences of Brexit may take some time to surface, but as an insurance broker it’s important for us to recognise its importance in relation to an issue which is one of our key concerns at the moment, the problem of underinsurance.

As we are sure you are aware, underinsurance remains a serious problem affecting a number of UK businesses. In essence, if a business owner is underinsured for either their physical assets or for the impact of business interruption, the size of any claim settlement is likely to be reduced.

Currency fluctuations

Why could the effect of Brexit cause underinsurance? Well, it matters if you have imported or would need to import a physical asset from overseas which is priced in a foreign currency, such as the Euro or Dollar, but the sum insured for that asset on the insurance policy is valued in Sterling.

Take for example a Printing Company which decided to buy a new printing press for its business, at a cost of EUR175,000. At the time (January 2016) the equivalent replacement value in Sterling would have been some £135,000 so that was understandably the figure stated on their insurance policy. All well and good at the time. However, Brexit has subsequently thrown a rather a large spanner in the works. As a result of the reaction of financial markets to the UK’s decision, the pound has depreciated markedly in relation to the Euro since 23 June, falling by approximately 15 percent since then. What this means is that the changing value of the currency now renders the old insured value of the printing press obsolete, as it has actually risen in absolute Sterling terms since then as the Euro has strengthened. The £135,000 figure now needs to be adjusted upwards to £152,000 to reflect its true, post-Brexit, value – an uplift of some 13 percent.

Similarly many UK manufacturers import parts from abroad, as do wholesalers and suppliers of goods and services. It is therefore likely that some of their costs have risen, which they may choose to pass on, making some UK goods and services more expensive. It is therefore a vital time to comprehensively review ‘new for old’ replacement costs.

Anyone in a similar position should keep a close eye on their sums insured and limits of liability to ensure that cover remains adequate and to take into account the sort of substantive currency fluctuations we have witnessed in recent months.

The importance of professional valuation

Ensuring that clients really do have the correct sum insured and indemnity period remains a crucial discussion point, a recent case study from one of our offices helps to bring this to life:

The building in question is a detached 25,000 sq ft factory built for the client in 1969 as a production works for precision engineering.

For the last 4 years, the issue of the adequacy of the building sum insured and the business interruption indemnity period were a discussion point in the pre-renewal meeting as they both seemed too low. A professional valuation of the building was recommended every year. However, the general manager of the client always maintained that the existing figures were adequate.

A crucial change came with the arrival of a new managing director, who prompted a reassessment of the insurance values. Following some very approximate calculations made by the new managing director it was agreed that the building was probably significantly underinsured and that a longer business interruption indemnity period was required.

Provisionally we agreed to increase the building sum insured from £900k to £2mn as a temporary measure and provide him with details of a professional valuation company who could assist with a an accurate figure.

CPA – our preferred professional valuation service provider - sent one of their surveyors out within 7 days to do a valuation on 24th October and on 27th October provided a valuation report to the client which recommended a building sum insured of £3.35mn. Following discussion with the client, it was agreed to increase the buildings sum insured and also increase the indemnity period from 12 to 24 months from the renewal date on 1st November.

Food for thought...

Some indicators you may be underinsured…

  • Significant currency fluctuations
  • Building being listed, made of stone, or was constructed prior to 1920.
  • The building, or Machinery, Plant & contents have not had a professional valuation within the last 3 years.
  • The building has recently been altered or extended or is in an unusual location, perhaps with restricted access
  • The property is finished to a significantly higher standard than normal or has 'eco-friendly' features.
  • The value is based on developer's costs, which are often much lower than one-off rebuilding costs due to economies of scale at the time of build.
  • You only cover an indemnity period of 12 months on your Business Interruption cover.
  • You haven't factored in costs for outbuildings, car parks, driveways, gates, fences, boundary walls, paving or lighting.

 ...When did you last undertake a professional review of your sums insured?

Business insurance from Towergate

At Towergate we don’t just offer traditional insurance broking: we believe that prevention is better than cure. That is why we have our own risk management consultancy focusing on pre-loss mitigation and business continuity, and have developed our own business interruption calculator.

We engage actively with insurers and our clients to obtain protection for businesses of all sizes. Our wide range of covers help protect your organisation should the worst happen.

See our range of specialist business insurance or contact your local office.

We are passionate about tackling the unprecedented levels of underinsurance in the UK: watch our video on how to avoid this for your business

Mark Brannon Cert CII, commercial, sales, broking and client directorAbout the author

Mark Brannon Cert CII is a respected industry leader with over 17 years’ industry experience in a variety of roles within the business insurance sector. He works across a wide spectrum of insurance product and policy development, delivery and optimisation for clients, including claims, insurer relationships, marketing and communications, and risk management.

Read more business insurance articles

For more information or for a full review of your insurance needs, please see our insurance specialisms, contact your usual Towergate Insurance Brokers adviser or email TIB@towergate.co.uk.

The information contained in this bulletin is based on sources that we believe are reliable and should be understood as general risk management and insurance information only. It is not intended to be taken as advice with respect to any specific or individual situation and cannot be relied upon as such. If you wish to discuss your specific requirements, please do not hesitate to contact your usual Towergate Insurance Brokers adviser.