The Devil is in the Detail! Why It’s Very Important to Get Your Sums Insured Right

The main reason for getting your sums insured right is because of the possibility of underinsurance. Most insurance policies will have an underinsurance clause called ‘average’. This means that if you make a claim and your sums insured are too low, the amount you are paid can be proportionally reduced.

Rob Creedon, Managing Director of Jensten Motor Trade, explains more about what this means and how to prevent it.

Example of a claim impacted by ‘average’ due to underinsurance

A medium sized property built of brick with a pitched tiled roof has a buildings sum insured of £450,000. A storm hits and the ground floor is flooded causing £80,000 worth of damage to the property. The claim investigation assessed that the true rebuild cost of the property was £600,000. This figure was based on costs including the rebuild, demolition, pathways, professional fees, garden fencing and statutory services. The property was underinsured by 25%. The ‘average’ clause proportionally reduces the claim payment in line with the percentage of underinsurance. The claim was for £80,000 so the payment is reduced by 25% to £60,000. The difference will need to be met by the policyholder to complete the repairs.

Why you might be underinsured

The impact of Covid lockdowns causing the slowing of material production with increase demand, and delays of EU imports due to Brexit have seen costs of materials and labour increase significantly in the last 12 to 18 months. The Building Cost Information Service (BCIS) General Building Cost Index indicates a rise of 10.2% in September 2021 compared to the same period one year ago. The BCIS Materials Cost Index represents the largest contribution to this increase, with the overall cost of materials in the index rising approximately 19.7% during this period.

Although much of this has started to normalise post-pandemic, there are still many risks presenting themselves to supply chains, such as trade embargos, labour shortages, and a rise in regulation. This could lead to your business being underinsured without you even realising. Many businesses underestimate how long it will take to fully recover their trading level after a loss, with many opting for a 12 month indemnity period rather than a more appropriate 24 month one. This can be especially crucial if your business requires specialist equipment to operate.

Increasing costs alongside rising demand and delays of imports may mean you could be underinsured.
Nick Hobbs, Chief Distribution Officer at Allianz, made the following comment in February 2024 regarding how the current climate can impact businesses and their underinsurance policies:

“There’s been no end of uncertainty for businesses over the past few years and although inflation has started to slow, businesses are still experiencing supply chain issues, labour shortages, and an unpredictable costs environment. Given this, indemnity periods still need very careful consideration, and any business that has under 12 months needs to seriously consider if this is enough, especially if the insurance and the values have been carried from the prior year largely unchanged.”

Without the correct level of business insurance, you could be liable to pay for any compensation claims out of pocket to cover essential business costs, such as tools and equipment, stock, building costs, etc. These unforeseen costs could be catastrophic, especially for smaller businesses.

Review your sums insured

It is good practice to review sums insured at least annually when your insurance policy falls due for renewal, but you should also ensure you are aware of external factors that could impact costs outside of your renewal.

If your business activity changes in any capacity, such as an increase in revenue, terms of reference changing, or switching from privately to publicly owned, then it’s vital you review that your cover remains in line with your activities.

If you need to obtain a professional valuation for insurance purposes, please contact us.