How underinsurance can impact your business

Andy Ferguson, Managing Director at Gallagher

Underinsurance can affect any organisation, and you may not know you are underinsured until you need to make a claim. Andy Ferguson, Managing Director at Gallagher in Bristol, outlines some of the key areas of commercial underinsurance.

Could your business afford to meet a substantial shortfall if an insurance pay-out turned out to be lower than expected? In many cases, underinsurance happens when valuations are out of date, roughly estimated, or incorrectly calculated.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.

Current market conditions and supply chain challenges have exacerbated the issue, and as your business continues to operate and evolve in these conditions, your insurance may need to keep pace.

Here are the key areas of underinsurance to watch out for:

Property: Letting your asset valuations become outdated and inaccurate could have negative implications for your cover.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: While it may seem sensible to select a cover amount you feel is appropriate, if it 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: A common insurance oversight for business interruption is that the period of cover selected to protect the business financially turns out to be far shorter than the actual period of disruption. It’s important to get a true picture of the time and resources your business needs to achieve pre-loss turnover levels. As the move to automation and digitalisation increases, for some business, it may take longer to replace key equipment, so this may need to be factored in.

Cyber liability: Cyber-attacks are ever-present, with 39% of businesses reporting a cyber-attack in 2021. Many companies may assume that cyber incidents will be covered under a standard business policy. This is unlikely to be the case, so 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: Without robust insurance, all it takes is a single supplier’s setback to collapse the remainder of your chain and cause serious financial issues. Organisations sometimes make the mistake of only naming tier-one suppliers in their business interruption policy, providing no insurance protection in the event of a catastrophe that occurs further down the chain.

The importance of an insurance review

Discovering you’re underinsured at the point of making a claim could be catastrophic for your business, so it’s important to have an independent professional carry out an audit of your valuations and insurance cover to help close any cover gaps and ensure you have adequate protection in place. 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.