Are your business insurance sums insured still accurate?
With rising costs, business growth and changes to property and equipment values, the amount you originally insured your business for may no longer be enough.
Regularly reviewing your sums insured is an important part of managing your business insurance and helping to protect your business against the financial impact of an unexpected loss.
What is a sum insured?
A sum insured is the maximum amount an insurer will pay for a particular section of your insurance policy, subject to the policy terms, conditions, exclusions and applicable limits.
Depending on your business insurance policy, sums insured may apply to areas such as:
- * Buildings
- * Contents and office equipment
- * Plant and machinery
- * Stock
- * Fixtures and fittings
- * Property improvements
- * Business interruption
It is important that these figures accurately reflect your potential exposure. If they don’t, you could find yourself underinsured following a claim.
Why is it important to review your sums insured?
Your business is unlikely to remain exactly the same from one year to the next. The value of your assets, the cost of replacing them and the financial impact of a major incident can all change.
Here are some of the key reasons to review your sums insured regularly.
1. Rising building and replacement costs
One of the most common reasons for underinsurance is simply the increasing cost of replacing or rebuilding property.
Construction materials, labour and professional fees can all increase over time. If your buildings sum insured was calculated several years ago, it may no longer represent the current cost of reinstating your premises.
It is also important to remember that the rebuild cost of a property is not necessarily the same as its market value.
Buildings insurance is generally based on the cost of rebuilding or reinstating the property, rather than what it could be sold for.
2. Your business may have grown
Perhaps your business has expanded since your insurance was originally arranged.
These changes can all affect the amount of insurance your business needs.
You may have:
- * Bought new machinery or equipment
- * Increased your stock levels
- * Expanded your premises
- * Taken on additional employees
- * Increased turnover
- * Added new products or services
- * Invested in improvements or refurbishment
Even if you have not made any major changes, gradual growth over several years can result in a significant difference between your current exposure and the figures originally used to arrange your policy.
3. The cost of your equipment may have changed
If your business relies on specialist machinery, technology or other expensive equipment, it is worth checking whether your current sums insured would cover the cost of replacement.
Don’t assume that the original purchase price is still an accurate guide. Replacement equipment may now cost substantially more, particularly where supply chains, manufacturing costs or exchange rates have changed.
4. Your stock levels may fluctuate
Businesses often experience changes in stock levels throughout the year.
For example, seasonal businesses may hold substantially more stock at certain times of the year, while businesses experiencing growth may simply carry more stock than they did when their policy was first arranged.
If your stock sum insured does not reflect the maximum value you could have at risk, you could be left without enough cover following a major loss.
Don’t forget business interruption insurance
Reviewing your business interruption insurance is just as important as reviewing your property and asset values.
If your premises were seriously damaged by an insured event, how long would it take your business to return to normal trading?
It could take considerably longer than expected to rebuild premises, replace specialist equipment, obtain planning permissions or source alternative premises.
Your business interruption cover needs to take into account the potential financial impact of an interruption, including factors such as your projected growth and the period you may realistically need to recover.
Your insurance broker can help you review whether the business interruption sum insured and indemnity periodremain appropriate for your circumstances.
What is underinsurance?
Underinsurance occurs when the amount you have insured something for is less than its actual value or the cost of replacing or reinstating it.
For example, imagine a property has a true reinstatement cost of £1 million but is insured for only £700,000.
Depending on the policy wording and whether an average condition applies, a claim could be reduced because the property was not insured for its full value.
This is why simply having business insurance in place isn’t necessarily enough.
The sums insured need to be appropriate too.
What is an average clause?
Some insurance policies contain an average clause, sometimes referred to as a condition of average.
Where this applies, an insurer may reduce a claim payment if the sum insured is inadequate in relation to the actual value at risk.
The precise way this operates depends on the wording of the policy, so it is important to understand the conditions that apply to your particular insurance.
If you’re unsure whether an average clause applies to your policy, speak to your insurance broker.
When should you review your sums insured?
As a general rule, you should review your sums insured at least annually, before your business insurance renewal.
However, you shouldn’t wait until renewal if there has been a significant change to your business.
Contact your insurance broker if you:
- * Buy significant new equipment or machinery
- * Increase your stock levels
- * Move to new premises
- * Extend or alter your property
- * Carry out significant refurbishment or improvements
- * Experience significant business growth
- * Change the nature of your business activities
- * Increase your turnover significantly
- * Take on substantially more employees
- * Make any other major changes to your business
Keeping your insurer or broker informed about material changes can help ensure your insurance continues to reflect your circumstances.
A regular insurance review could help protect your business
Your insurance policy should reflect your business as it is today — not how it was several years ago.
Taking the time to review your business insurance sums insured can help identify potential gaps in cover and reduce the risk of discovering that you’re underinsured when you need to make a claim.
At your next insurance renewal, don’t simply check the premium. Take the opportunity to review the values behind your policy too.
If you’re unsure whether your current sums insured are adequate, speak to your to us.
We can review your existing cover with you and help identify areas where your insurance values may need updating.
Need help reviewing your business insurance?
Our team can help you review your existing insurance arrangements and consider whether your sums insured remain appropriate for your business.
Get in touch with us today to arrange a review of your business insurance.
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