In 2022, a Sedgwick survey* estimated that 80% of UK small and medium-sized enterprises (SMEs) were underinsured. That means over 3.4 million UK SMEs don’t have the insurance protection they need and could face significant financial problems should they need to make a claim.
This Business Underinsurance Guide explains what business underinsurance is, the potential consequences, and how to avoid the underinsurance trap.
Business underinsurance occurs when a business doesn’t have sufficient financial protection to cover its risks.
The Chartered Institute of Loss Adjusters** has said that 40% of claims involve underinsurance. This typically accounts for between 35-40% of the total claim, a shortfall that has to be made up by the policyholder.
Insurers base their quotes on the ‘sums insured’ – the value of the business assets that need covering. It’s your responsibility to ensure that these valuations are correct. If they aren’t and you have to make a claim, then your insurer may seek to correct them. This correction can either mean they ask you for increased premiums to bring them in line with the cover you’d need for the claim, or they may invoke the ‘average clause.’
Average clause explained: Your payout can be reduced to match the level of cover you’ve been paying for. So, let’s say you need to make a claim for £100,000 following a fire. The insurer looks at your policy and sees that you have only been paying for £50,000 of protection. The insurer will be within their rights to pay you £50,000, leaving you to find the rest.
Under the 2015 Insurance Act, you must provide insurers with a ‘fair representation’ of the risk; if you accidentally underestimate these, you could be left facing a hefty shortfall. Worse, if you’re deemed to have deliberately underestimated the cover you need to get cheaper business insurance, the insurer could void the policy, and you’ll receive nothing.
While your insurance broker will be happy to help you get the business insurance you need, it’s your responsibility to ensure that your insured sums are correct.
There are several causes of underinsurance, including:
Sums insured are too low – policies need to cover the value of the business’s assets and have appropriate indemnity limits – the maximum amount an insurer will pay in a given period. For example, this could include the potential cost of a professional indemnity claim or system recovery following a cyber-attack. Ideally, you should review your sums insured ahead of renewing your business insurance.
Business interruption periods are too short – while most businesses have business interruption insurance, the indemnity periods are often too short. The British Insurance Brokers Association estimates that 43% of companies’ business interruption coverage is around half what it should be at a year***. Supply chain issues, shortages of labour, and the complexity of rebuilding IT systems can mean that it can take up to two years to get a business back up and running.
Asset valuations are outdated – inflation has pushed up prices across the board, and it’s important to make sure your valuations are correct.
Accountancy and insurance definitions of gross profit are different – an accountant’s gross profit calculation will subtract any cost that varies in proportion to production, but for insurance purposes, they must vary in direct proportion. This is a key distinction and a source of many underinsurance problems
Standard policy limits aren’t right for all businesses – some businesses will require higher indemnity levels on certain policy elements depending on the level of risk they face. Again, this is something your broker can help you with when arranging business insurance.
Having incorrect sums insured is one of the ways that businesses fall into the underinsurance trap. To help you calculate sums insured correctly, here is our guide to getting the right valuation for your property, contents, stock, plant and machinery, business interruption, and liabilities.
Some business owners underestimate the sums insured for their buildings. When calculating business premises sums insured, you need to:
A typical business insurance policy can cover contents, stock, plant equipment and machinery, but there are some things that you’ll want to look out for:
Another significant cause of underinsurance is business interruption periods are too short. Business interruption insurance can provide you with an income should you be unable to trade owing to damage to your premises, flooding, or another loss. Having the right indemnity period is important. To make sure yours is long enough, consider:
Liability cover, whether it’s public liability insurance, employers’ liability insurance or something more specialist, such as directors’ and officers’ insurance, comes with indemnity limits. To work out what limits you need, think about:
Business underinsurance is a serious problem, but there are some simple things that you can do to limit your chances of falling into the underinsurance trap:
*Sedgwick survey 2022
** The Chartered Institute of Loss Adjusters 2022
*** Biba Manifesto 2023
°° Rebuild Cost Assessment Survey 2021
Exciting news, Jensten Insurance Brokers hits the awards scene. We're celebrating being shortlisted for Commercial…
What’s the Difference Between Hired-in and Owned Plant Insurance? As one of the UK’s leading…
Hold onto your insurance details! The Motor Insurer’s Bureau (MIB) is revamping its services, upgrading…
As well as having a documented health and safety policy, the Management of Health and…
Implementing proper health and safety measures in your workplace shouldn’t be treated as a burden…
What You Need To Know Every employee is entitled to a work environment where health…