Underinsurance of a property continues to be a pertinent issue affecting business owners who have made a claim following damage to their premises.
The proprietor of the business will obtain cover under the belief that in the event of a catastrophe – storm damage, a fire or loss of valuable machinery for instance, that their insurance will cover these costs and the business will be operational again following little disruption and minimal financial loss.
Unfortunately, this is often not the case as the insurance that has been purchased fails to cover the true value of the loss, particularly when it concerns business interruption, property and plant and machinery. The Chartered Institute of Loss Adjusters (CILA) found that up to 40% of businesses were underinsured by an average deficit of 45%, whilst a recent survey compiled by specialist valuers Rushton International found that 40% of their surveyed clients were underinsured for their plant and machinery inventory by an average of 20%.
There a number of explanations as to why properties are found to be underinsured, the following points will help you to make sure that your property and equipment is accurately valued and appropriately covered.
1: Conduct a professional valuation on the property.
When it comes to commercial property insurance, the market value and the rebuild / reinstatement value often get confused. From an insurance perspective, the market valuation is largely irrelevant and instead it is the rebuild / reinstatement cost that is the most critical factor.
In seeking and securing a professional valuation, there is the potential for a whole range of other issues that can be identified, which might otherwise remain obscured.
2: Take everything into account – the ‘property’ is not limited to just the building
It’s important when obtaining cover that all of the assets are identified. For sum insured purposes the value needs to include roads, hard standing areas, internal features, outbuildings, car parks, walls and electricity sub stations, everything that is defined as part of the “building”.
3: Have you renovated or extended the property?
If you have undertaken any developments to the property then it’s also necessary to increase the sums insured on the property.
4: Is the property listed?
Listed buildings often require additional attention when it comes to valuations and the insurance in place to rebuild them. Not only are there strict guidelines in place around reinstating what was in situ, but the timeframes and requirements to secure the appropriate materials and permissions can be longer and more difficult.
5: There are a lot more costs to a new development then just the new build.
It’s important to remember that when developing a new building on the grounds of existing premises that there are a number of additional outlays that need to be appropriately considered, including professional fees, the removal of the damaged structure and debris removal. For example, the identification of asbestos in a building can significantly increase the cost of debris removal at the time of a claim. Whilst the fluctuating cost of steel can also incur significant cost.
6: In the event of a catastrophe, always allow sufficient recovery time.
The majority of Business Interruption claim issues arise from inadequate indemnity periods. Following a catastrophe, 12 months is rarely an adequate length of time in order to repair /reinstate a property and to resume full operation. Depending on the extent of the damage to the building it may be necessary to obtain planning consent as new builds can rarely be rebuilt in an identical fashion to the previous structure. Obtaining planning consent in itself can be a lengthy process and this has to be conducted prior to any developments taking place.
7: Changes to regulations can have an impact upon rebuild methods.
Changes to building regulations and other legislative processes can have a significant impact upon building developments. Fire safety, drainage and waste disposal, energy efficiency and disabled access are all areas in which their inclusion and associated costs need to be considered.
8: The sum insured for plant and machinery needs to reflect the replacement cost for new equipment.
Many plant and machinery policies are written on a “new for old basis” and therefore the sum insured needs to be on the basis of what it would cost to replace all of the apparatus with brand new equipment, even if the damaged equipment was initially bought second-hand. The sum insured is often based upon the original cost of the machinery which may have depreciated over time or new pieces of equipment may have superseded the original, these however maybe more expensive to purchase.
9: It all adds up, even the smaller items of equipment.
Including all of the larger items of machinery is important; however the smaller items shouldn’t be over looked. The cumulative costs of replacing hand tools and racking can be costly, even if the individual cost of each item is not significant.
10: Have a Business Continuity Plan.
It is integral to have a robust Business Continuity Plan in place and should include a client’s dependency on suppliers and the anticipated level of customer loyalty following a major incident. Both of these factors can significantly affect the amount of Business Interruption cover required.