27 Aug Are You Underinsured? An insight into how a claim could be affected

What is underinsurance?

Underinsurance is a preventable but often devastating consequence of not insuring your businesses assets or income for the full replacement value if an Insured Event were to occur. There are many ways you can be underinsured, but a few which can be more common are:

• Inaccurate Sums Insured for property, including building, stock and contents as well as removal of debris after an Insured Event.
• Inaccurate Sums Insured for your equipment and machinery
• Inaccurate Sums Insured for gross profit and additional costs of working if you have a Business Interruption Insurance policy.

While it’s easy to assume your business’ insurance policies will cover the full cost to rectify any damage to assets or lost income, rising inflation, high replacement costs or business growth may mean either the sums insured declared in your policy/ies may not cover the full cost to bring your assets back to their original condition or replace your lost income at the time an Insured Event occurs.

Underinsurance is a growing problem in an environment where building costs are escalating. At the same time, rising day-to-day expenses are putting pressure on your business to control costs.

You may be underinsured if …

The rule of thumb when identifying whether you are underinsured is when the Sum Insured in your policy will only cover 80–90% of the cost of replacement of your business’ assets – depending on your policy wording. 

Here is a checklist to help you identify ways you may be underinsured:

• Do you understand how to calculate the replacement value of your business premises or equipment and machinery?
• In the past year, has your policy been updated to reflect the rising cost to replace or rebuild your property as construction materials like wood, steel and cement have risen?
• Have there been bushfires or floods in your area that have impacted the cost to rebuild your business premises as building standards may have changed?
• Have you accounted for the cost to remove debris after a loss?
• If your business has experienced recent growth, are your financial statements up to date? Is this reflected in your Business Interruption Insurance policy?
• Have you let the Sum Insured amount in your insurance policy carry over without a review?
• How long is the Indemnity Period in your policy? And is it long enough to sustain your business? Staff shortages, extended council approval lead times and logistical delays from domestic and international suppliers are common factors contributing to this issue.

Underinsurance in practice

Scenario One – Commercial Property

A shopping centre, with a range of specialty stores and supermarkets took out a policy a number of years ago with a Sum Insured of $1,500,000. Over a number of years, the Sum Insured of the shopping centre was not adjusted.

When the property suffered significant fire damage the insurer calculated the current value of the shopping centre to be $2,000,000. This meant the business was underinsured by a total of $500,000. The actual loss caused by the fire was calculated by the insurer to be $500,000.

When the insurer applied the Co-insurance formula, the claim payout was a total of $468,750. This resulted in a shortfall of $31,250 leaving the insured to pay the balance to restore their business. 

At claim time, insurers use a Co-insurance formula to calculate the total claim amount you will receive.

Insured Value ÷ 80% of replacement cost x Amount of Loss = Amount Payable by Insurer

Scenario Two – Business Interruption

A large commercial catering business operating in a suburban town centre took out a Business Interruption Insurance policy with a Sum Insured for gross profit worth $20,000. The disclosed annual turnover of the business was $1,200,000.

When the insured suffered significant damage to their premises, they couldn’t operate for 3 months.

As a result of the damage, the business’ loss of gross profit during that period was $200,000.

When the insurer applied the Co-insurance formula, the claim payout was a total of $4,166.

This resulted in a shortfall of $195,834 leaving the insured to pay the balance of loss incurred during the closure period.

At claim time, insurers use a Co-insurance formula to calculate the total claim amount you will receive.

Insured Value ÷ 80% of replacement cost x Amount of Loss = Amount Payable by Insurer

*80% is a common percentage but is negotiable.

How we can help

Working with an experienced insurance broker is one of the best ways for businesses to reduce the risk of underinsurance. We understand insurance can be complex, and it can be devastating if you get it wrong. We can help…

• Navigate valuation process – Guide your business through the valuation process to help make sure your sums insured are accurate.
• Insurance policy updates – Regularly conduct check-ins to help ensure your policy is up to date with current values.
• Use tools for accurate sums insured – Access advice and unique tools to check sums insured accurately reflect your property values and the replacement value of stock, equipment, machinery, business essentials and gross profit.
• Expert advice on extras – Provide expert advice on important policy extras such as trade credit insurance, machinery breakdown or cyber insurance that may not be included in your standard business pack.

At CRM Brokers we have the knowledge, experience and tools to help accurately assess your sums insured. Contact us today on 1300 880 494 to discuss your needs.

This general information does not take into account your specific objectives, financial situation or needs. Deductibles, exclusions and limits apply. Insurance is issued by various insurers and can differ.

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Important Notice

Disclaimer:  Terms, conditions, limits, deductibles and exclusions apply to the products referred to above. Any advice in this article is general advice only and has been prepared without taking into account your objectives, financial situation or needs. Before making a decision to acquire any product(s) or to continue to hold any product, we recommend that you consider whether it is appropriate for your circumstances and read the relevant Product Disclosure Statement (‘PDS’), Financial Services Guide (‘FSG’) and the Target Market Determination (‘TMD’) which can be obtained by contacting CRM Brokers.

Information is current as at the date the article is written as specified within it but is subject to change. CRM Brokers make no representation as to the accuracy or completeness of the information. Various third parties have contributed to the production of this content. All information is subject to copyright and may not be reproduced without the prior written consent of CRM Brokers.