Business Underinsurance: Why and How to Avoid it

March 24, 2015 by Brendan Goddard

Underinsurance can present a tremendous challenge to an individual or business. Essentially, underinsurance refers to a policy that provides an inadequate level of coverage for a policyholder. Home insurance, for example, which only provides a certain dollar amount of coverage in case of damage, may not be the appropriate amount. In the event of a catastrophe, the policyholder may find the extent of their damage is much greater (and more costly) than anticipated. What isn’t covered by the policy will fall on the shoulders of the insured, and can result in significant financial burden or collapse.
Too often, policyholders are underinsured because of improper guidance or planning. Lower insurance premiums also result from underinsurance, which can seem appealing to the insured at first glance. So, how can you avoid underinsurance for your business?

Understanding Your Business & Assessing Truthfully

A surprising number of Australian businesses are underinsured. It’s vital that your insurance cover allows for the true value of the business: buildings, equipment, assets, etc. In addition to these tangible elements, your policy should allow for the cost of rebuilding and recovery (the replacement value.) Too often, business owners try to lower their premiums by insuring only a percentage of the replacement value. This can cause trouble when disaster strikes and unexpected costs begin to mount.
Most businesses, large and small, are constantly evolving and growing. Your insurance should be reassessed as changes occur, to account for these new developments. Business owners who neglect to assess these transformations find that their expanding business suddenly lacks proper cover. This can be financially devastating if the unthinkable occurs.

Will I Have to Pay?

Within most business insurance policies there is a section known as the ‘Under-insurance’ clause. This limits the amounts payable under a claim if the sum insured on the property is understated. Depending on the policy, the property must be insured for at least either 80% of the replacement value or 85% of the replacement value. However, replacement value does not mean what you paid for the property, it means the actual cost to demolish and rebuild damaged building structures, or the replacement cost with for new items/contents.
It’s difficult for a business owner to find out he or she must pay additional costs to repair their property because it was underinsured. Not long ago, a recent issue occurred with a property owner who owned an industrial building on the South Coast containing two units, one occupied by a dry cleaning company and the other by an electrical contractor. One night, the dry cleaning company inadvertently left a large commercial dryer running. A fire started within the dryer and quickly spread up the walls and through the roof of the building. Although the building was full brick with a steel frame, the heat from the fire caused the mortar in the brickwork to crack and the steel roof frame to warp. A structural engineer recommended the roof frame and roof be replaced and one wall of the building required replacement. The cost of repairs came to around $250,000.

The Results:

● The building was insured for $500,000. The actual cost of replacement would be $800,000.
● The owner’s insurance policy had an 85% underinsurance clause meaning that the owner would need to insure their property for at least $680,000 or the insurer will apply the under-insurance clause to the claim.
● The Insurer settled the claim as follows: Based on the lower value of $680,000 and the sum insured of $500,000, the underinsurance would be calculated at approx. 26.5%.
● This means that the owner of the building had to pay 26.5% toward the cost of the claim, or $66,250.

Avoiding Underinsurance

Sadly, the owner did not have the financial means to pay that amount, and was forced to sell his property at a significant loss.
For a small business owner, your business is your livelihood. Ensuring you have the proper coverage is paramount. For only a few dollars more per monthly premium, you can be sure your business insurance will truly cover you in case of damage or disaster. Working with an experienced and qualified broker like Macey’s can also give you peace of mind. Our team can properly assess your risks and evaluate your assets, helping you select the right policy and the appropriate coverage amounts. It is also recommended that regular insurance replacement valuations be carried out by a registered valuer or a builder who can give you an accurate estimate of the property’s rebuilding cost.
Want to make sure you have the right cover? Contact our friendly, expert representatives at Macey’s Insurance Brokers today for more information on avoiding underinsurance and protecting your property.

Brendan Goddard

Brendan Goddard

Director at Macey Insurance Brokers
Brendan has been a director of Macey since 2005 and in addition to servicing his portfolio of clients he is committed to the continuing management and growth of the business including general operations, human resource, marketing and IT management.

Brendan is a Qualified Practicing Insurance Broker and holds an Advanced Diploma of Financial Services (Insurance Broking).
Brendan Goddard

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