Major loss events reveal underinsurance dangers
- A major loss, such as fire or flood, can strike unexpectedly
- The discovery of underinsurance following a major loss could not come at a worse time
- We look at how you can ensure your sums insured remain accurate
Underinsurance is often discovered following major loss events, such as fires and floods. When faced with a potentially long and difficult recovery, the impact of underinsurance could not come at a worse possible time.
It is therefore essential to ensure that you are correctly approaching the task of setting sums insured, and that you continually review any figures to account for changes and avoid the perils of underinsurance.
Underinsurance occurs when the subject of your insurance is insured at less than its true value. This can result in claims settlements being reduced and the need to source additional funds in order to fully recover.
Regular professional valuations are always recommended, as valuing assets for insurance purposes can present a number of potential pitfalls – for example, requiring varying approaches for assets insured on either a reinstatement or indemnity basis.
And, it is not just tangible assets that are susceptible to the perils of underinsurance – according to the Chartered Institute of Loss Adjusters, as many as 40% of business interruption policies are underinsured, with the average shortfall running to 45%. This can arise for a number of easily avoidable reasons, such as misunderstandings over the term ‘gross profit’ for insurance purposes or choosing an inadequate indemnity period.
Although major loss incidents are thankfully rare, when they do occur the damage inflicted upon businesses can be grave. The discovery of underinsurance at this time can add signifiant additional hardship, yet is entirely avoidable if proper care is taken.
“Underinsurance is a perennial problem and it is difficult to understand why the issue seems to have such a low profile at executive board level when it poses such a threat to business survival and on-going success following a major loss,” said Adrian McGuire, Zurich’s Head of Commercial Broker Property.