The perils of underinsurance – Are your commercial buildings underinsured?

In Ireland, rebuilding costs have increased by around 21% since 2016 ^[1] , with rising construction materials and supply chain issues. According to the latest report from the Consumer Price Index, inflation hit 6.7%  in April.^[2] With rising prices, this may mean your property is underinsured.

Following a major loss, a lack of adequate limits and cover in place can hinder a business’ recovery speed and possibly jeopardise its chance of survival. Having a comprehensive insurance programme in place will ensure you can get back to business as usual as quickly as possible. It is important that throughout your policy you are continually assessing your sums insured and ensuring accurate levels of cover are in place.

Underinsurance occurs when either the sums insured on a policy do not represent the current value of the items at risk or where limits within a policy are inadequate for the policy holder’s needs. It is important to remember that any sums insured should represent the full extent of the risk. In the case of buildings cover, you should consider the rebuild cost, debris removal and professional fees in the building sum insured. When insuring contents, you should consider the cost of replacement along with the timelines of obtaining replacements.

In the event of a claim, underinsurance can result in economic loss to the policyholder as insurers will apply Average to any losses. Average works by reducing the amount of the claim by the same percentage of underinsurance. In extreme cases, the insurer may consider the underinsurance to be a misrepresentation of the risk which could enable them to impose additional terms or even void the policy.

Indemnity periods on Business Interruption insurance should also be considered when reviewing your insurance renewal. Standard 12-month indemnity periods may not be a suitable time-frame for your business to recover so you should consider 24 or 36-month indemnity periods.

So, how can you avoid being underinsured?

By reassessing your sums insured and policy limits, you can consult with a Professional Valuation service to receive guidance on the values that you have at risk. Some will simply look at buildings, whilst others will also review assets.

Some insurers will waive the Average condition where a professional valuation has been obtained within the last three years. This means that, if the sums insured have been based on a professional valuation (and index linked), then any claim payment will not be reduced. Something that could mean the difference between a business surviving or going under!

Sources:
1. https://www.independent.ie/business/personal-finance/insurance/building-costs-rise-means-halfof-homes-are-now-underinsured-41231288.html
2. https://www.cso.ie/en/statistics/prices/consumerpriceindex/
3. https://www.thejournal.ie/state-pay-70-inflation-related-construction-costs-5759683-May2022/
4. https://www.gov.ie/en/press-release/a346d-minister-mcgrath-introduces-measures-to-address-the-impact-of-construction-material-price-inflation-on-public-works-projects/