Underinsurance. (Business Interruption cover) 2. (the number of months you are insured for)

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Blaze O’Connor’
6 years ago
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1 UNDERINSURANCE

2 Underinsurance WHAT IS UNDERINSURANCE? Underinsurance is the failure of a business to set adequate sums insured or fully cover their potential losses. For instance: Building or Contents cover that has been set below the full cost of replacement. Where your selected loss of income 1 is not adequate, or the indemnity period 2 is too short for the time required for a business to fully recover. 1 (Business Interruption cover) 2 (the number of months you are insured for) WHAT IS AVERAGE? In order to ensure they collect adequate premiums for the risks covered, each business needs to contribute their respective share based on their full reinstatement value. Therefore, an Average Clause is usually applied to a Property/Business Interruption policy and it is under these terms that insurers will proportionately reduce their settlement by the level of underinsurance. For example, if a Hotel owner had insured their property for 250,000 when the Sum Insured should have been set at 500,000 and it subsequently sustained damage as a result of a fire to the value of 100,000 then insurers would pay a total of 50,000 as only 50% of the replacement value had been insured. WHY DOES UNDERINSURANCE OCCUR? There are a range of reasons this occurs but the most common reasons are: Calculating the Cost of Reinstatement Certain factors need to be considered when assessing the Cost of Reinstatement Sum Insured, including: Assessing the Rebuild Cost and not Market Value Understanding the impact of Listed Features Ensuring the value of Contents, are insured on a New for Old basis with no allowance for depreciation Determining these is a specialist discipline and it would always be recommended that you refer to a RICS (Royal Institution of Chartered Surveyors) qualified surveyor for buildings sum insured. The insurance industry views best practice to undertake these assessments annually and certainly no longer than three year intervals. At these points the surveyor will take into account a number of considerations such as legislative requirements, inflation and any alterations made to the fabric of the building. INADVERTENT OMISSION OF ITEMS A number of additional aspects which should be taken into account when assessing a Reinstatement Sum Insured are often forgotten or not allowed for, including: Professional Fees, e.g. architects costs The cost of debris Removal Foundations, i.e replacing damaged foundations Public Authority Requirements, e.g. a Public Authority may charge you for closing access to a public road Value Added Tax INFLATION Naturally it is going to be difficult to assess the impact of inflation over an extended period, however, it is important to undertake this calculation as it is always possible for a major loss to occur at the end of a policy period with works taking a number of years to complete. It is for this reason that it is recommended for a business to request their insurers apply Day One cover which will afford an inflation provision (usually 15% or above) to the Reinstatement Sum you declared. Without this it is incumbent upon you to build in additional inflation to the original sum insured (Declared Value).

4 Underinsurance BUSINESS INTERRUPTION Calculations for business interruption (loss of income) can sometimes be complex. For example, the policy cover can be for full loss of revenue but most package covers are issued on a loss gross profit basis. So it is important to check what the sum insured should represent. Not only will this ensure the policy is insured on the correct basis it will also protect against an unintended breach of bank covenant. The calculation of the Sum Insured and Indemnity Period (the period which the policy covers you for) should also be forecasted against the time it is estimated the business should take to fully return to its trading position at the time of the loss occurring. Therefore, an assessment of potential delays such as those detailed below should be undertaken: Required materials to rebuild your building and their availability Potential planning delays and constraints Investigation delays: e.g. a coroner's inquiry arriving from the death of customers Effectiveness of Business Continuity Plans Time to recover customer loyalty ENTERPRISE ACT 2016 Thanks to the Enterprise Act 2016 there is a greater emphasis on an insurer to pay back compensation in a timely manner. If an insurer doesn t, then you as a business have a right to claim for damages caused by an insurance company who have not paid in a reasonable timeframe. You can claim as long as your claim meets the below criteria: It is a valid claim There has been an unreasonable delay Your business has suffered an actual loss The loss was caused by an unreasonable delay The loss was foreseeable You and your business took all reasonable steps to mitigate any loss If you wish to discuss Underinsurance or the Enterprise Act further then speak to one of our Advisors on

6 About Christie Insurance Christie Insurance is part of the Christie & Co network and has over 40 years experience trading in the insurance market. We choose to only compete in a small number of sectors, allowing us to become highly knowledgeable and experienced in those chosen areas. As a result our customers can feel reassured that we will be getting them the right insurance for them at the right price. If our customers are ever unfortunate enough to have to make a claim, they can feel rest assured knowing that we deal with all of our claims in house and will work tirelessly to get you the result that you deserve. For more information contact enquiries@christieinsurance.com christieinsurance.com This bulletin is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this bulletin we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained. You should not act upon (or should refrain from acting upon) information in this bulletin without first seeking specific legal and/or specialist advice. Christie Insurance accepts no liability for any inaccuracy, omission or mistake in this bulletin, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein. Christie Insurance is a trading name of Arthur J. Gallagher Insurance Brokers Limited which is authorised and regulated by the Financial Conduct Authority. Registered Office: Spectrum Building, 7th Floor, 55 Blythswood Street, Glasgow, G2 7AT. Registered in Scotland. Company Number: SC108909

Arthur J. Gallagher - Education Practice

t Arthur J. Gallagher - Education Practice Insurance Procurement For Colleges PHILIP WEBSTER Executive Director - Education Direct Dial: Mobile: Email: 01924 234 028 07717 802 518 Phil_Webster@ajg.com