Prevent the trauma of under insurance

– get value for money from your insurance premiums

By:   John Meadows of Sagar Insurance

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Prevent the trauma of under insurance  –  Insurance works by pooling risk. A large group pay their premiums in to the insurance pool and this allows the insurance companies to pay the claims which arise (whilst also making a profit themselves!)

Everyone pays a substantial amount to insure their businesses and they need to be confident that if they need to make a claim then it will be paid in full. The amount each individual pays in premium is based on the amount of risk, or exposure their business activities brings to the pool.

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One of the main measures of exposure is the value, or the sum insured, of buildings, contents and gross profit. Insurers need to ensure that everyone is paying a fair premium in to the pot and so very often there is an “under insurance” clause in the policy wording.

For instance if it would cost £2m to rebuild a building but it has only been insured for £1m then only half the fair premium has been paid and consequently insurers will only pay out a proportion of the claim. The consequences for the business can be disastrous and the premium paid suddenly does not look “good value for money”.

A few guidelines to avoid under insurance :-

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Understand what should be included in the sum insured.

For instance the sum insured for buildings is what it would cost to rebuild including such things as removal of the debris and applying for planning permission. The market value may well be higher or lower than the cost to rebuild.

The sum insured on Gross Profit should include the wage roll as in most cases staff will still need to be paid even though the company may not be trading or trading on a reduced basis. The exact figure can be decided in conjunction with your accountant.

Understand the basis of cover.

Contents are generally insured on a reinstatement basis which means that they are replaced on “new for old” basis but the sum insured needs to reflect the cost of the new items. It is possible to insure contents on an indemnity basis where items would be replaced by equivalent second hand items. This may be appropriate where a lot of machinery is to be insured and there is a healthy second hand market in those machines. The sum insured can be lower with a subsequent saving in premium. The logistics of replacing items quickly needs thorough investigation.

Insurance Time to Rebuild

Understand the timescale

Business Interruption insurance covers the loss of gross profit following a claim. Do not underestimate the time it would take the business to recover from the effects of a large fire or flood. Rebuilding can take longer than expected and customers disappear in to the ether.

The moral of the story

Give careful consideration to your sums insured and ensure that you get value for money from your insurance

 

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Contact Details

Telephone: 01282 858250

Facsimile: 01282 858299
Group First House

12a Mead Way

Shuttleworth Mead

Padiham

Lancashire BB12 7NG