Being underinsured for assets is a growing concern for businesses throughout Australia.
As world events continue to negatively impact the economy, it comes at no surprise that businesses are looking for numerous ways to cut costs. This is particularly true when it comes to cutting investment in business insurance, especially with insurance premiums increasing at record rates.
Whether as a result of misinformation or deliberate choice, some businesses are choosing to save money by not insuring their assets at full value – this is called being ‘under-insured’. The long term cost of being under insured, however, could far outweigh the perceived short term savings of being under insured. In the end, businesses can end up with crippling losses.
It’s also common for business owners to underestimate either the reinstatement or replacement costs of their business assets after a damaging event such as a fire or storm. If the sum insured doesn’t reflect an up-to-date reinstatement or replacement cost, you will be underinsured and may face substantial out-of-pocket expenses if you need to make a claim.
The real costs of underinsurance: example
Let’s look at this example. Let’s say you insure a building for $500,000 but it is found that it is actually going to cost $1,000,000 to rebuild/replace the building.
The insurer would take this to mean that you have chosen to self-insure 50% of the risk and therefore only need to pay 50% of the sum insured. Which means that 50% of the sum insured is $250,000.
So at a loss of $1,000,000, you will only receive $250,000 for the claim. This means you will need to have an extra $750,000 to make up for the loss – a potentially much higher expense for the nominal cost of insurance.
In summary, if you are underinsured, the insurer will assume you are choosing to self-insure a percentage of the risk yourself.
Ways to get around this
The first thing you need to do is realise that there could be other ways to save on your insurance premiums without exposing your business to underinsurance.
Again, we’re going to sound biased here – but speak to a business insurance broker (like us!), who read policies on a daily basis. We’ll help comb through the fine print for you, and can help spell out for you, in plain English, various ‘loopholes’ in your insurance policies that could spell out disasters in the future; at the same time, we can find other avenues for you to save money.
When it comes to underinsurance, business insurance brokers also have a number of tools, such as Business Interruption Insurance calculators, designed to help you negate these risks. Contact us if you would like to use this calculator free of charge.
Overcoming underinsurance – the technical stuff
With underinsurance-related costs, there is usually a little leeway in some policy wordings – usually 20%. This is where it is important to ensure that the sums insured are adequate by checking with an Approved Valuer or using an insurer-approved tool provided by your broker.
There are also some options to remove underinsurance clauses. Note that each of the insurers are different and not all offer both of these options below. It is advisable to do your research, or speak to a specialist regarding the following:
OPTION TO REMOVE UNDER-INSURANCE CLAUSE – BUSINESS INTERRUPTION:
Under certain policies, there is a feature which will remove the above Under Insurance clause for the business interruption section provided:
The Sum Insured shown in the Policy Schedule for Insurable gross profit basis; or Annual revenue basis, has been calculated:
- Using a Business Interruption Calculator, and
- Your GST exclusive sales income figures from your Business Activity Statement are as stated in the calculation
As mentioned above, we have access to a Business Interruption Calculator that is free of charge for you to use. Contact us if you would like to discuss this further.
OPTION TO REMOVE UNDER-INSURANCE CLAUSE – PROPERTY SECTION:
You can also remove this clause under the property section by:
- Providing a valuation prepared by an approved valuer not less than three years before the commencement of the period of insurance, and which an approved valuer has updated not more than twelve months prior to the commencement of the period of insurance. ‘Approved valuer’ means a certified practising valuer registered with the Australian Property Institute within the relevant property discipline.
- Ensuring that the property insured has been insured under this Policy for the full value stated in the valuation
If any of the above jargon flew over your head, don’t worry – you’re not alone. The most important message you must be aware of is that being underinsured could spell disastrous consequences for you and your business should things turn for the worse. The good news is there are practical solutions to this, and there are other ways to save money on rising insurance premiums that won’t leave you being underinsured.
If you’d like a transparent conversation to see if you’re underinsured, or would like to discuss your options about reducing your premiums, don’t hesitate to contact us.
This article was written by Alishia Oliver,
Account Manager at Crucial Insurance and Risk Advisors.
For further information or comment please email firstname.lastname@example.org.
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