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Underinsurance: the accident waiting to happen for UK properties

Underinsurance is rife

In recent years, it’s felt as if barely a week goes by without some kind of catastrophe occurring – and yet, despite this backdrop of pandemics, natural disasters, energy crises, and international unrest, an astonishing number of businesses don’t have enough business interruption cover in the event of catastrophic loss. 

In fact, 43% of businesses (according to RICS) fall into this category – while, more broadly, 80% of commercial properties are simply underinsured.

Not only are all these commercial properties underinsured, but – according to recent research from Towergate – they tend to be underinsured by a substantial amount. On average, buildings like warehouses, shops, and factories are only covered for 69% of the amount they should be – which, taken together, amounts to an eye-watering £325bn.

It’s very easy (as these numbers imply) for commercial business owners to sleepwalk into underinsurance, choosing to renew their policy without a thorough reassessment of their property’s value – and, as with sleepwalking, this can mean waking up to a nasty surprise.

Condition of average: what does it mean, and what are its consequences?

Surprise is, in fact, precisely how many people feel when they encounter the consequences of underinsurance, which often take the form of the condition of average – a policy term that should never be applied, but which the 80% of still-underinsured business owners need to understand.

Condition of average works as follows: if you’re underinsured by X% and you suffer a partial loss, your pay-out will be proportionately less than you need.

Say, for example, that your building is worth £500,000, but it’s only insured for £250,000 – in this case, you’re only covered for 50%, and you’d be considered underinsured.

If, in this hypothetical scenario, your building suffers partial damage that will cost £100,000 to repair, the condition of average means that you won’t get a £100,000 pay-out – instead, you’ll only receive £50,000, because you’re only insured for 50% of the building’s worth.

The salt in the wound here, of course, is that the condition of average kicks in even though your coverage as a whole exceeds the £100,000 you need.

Is index linking your sum insured going to give you enough protection?

In a word: no.

Index linking is absolutely an important weapon in the fight against underinsurance, of course – the process allows you to increase your policy sum every time your renewal rolls around, taking into account various changes (like material costs, for example) that might increase the value of the property.

However, while this is vital – especially for the significant proportion of homeowners who stay with the same insurer for five years or more, becoming more vulnerable with every passing year – index linking doesn’t tell the whole story.

Contents, for example, is often overlooked and rarely reviewed. In fact, only 48% of home contents policies apply index linking.

This leaves high value items like jewellery underinsured, and – on many occasions – never paid in full.

Your broker can help – and they’ll want to!

This kind of information might prompt a few questions: am I insured for an adequate amount? When did I last properly review?

If so, it’s highly advisable to ask a broker to check that your sums insured remain adequate – and to commit to an annual reassessment from now on.

Not only will a good broker make sure that your low premiums don’t come at the cost of incorrect cover, but – given that property incurs some of the highest commissions – I’m confident they’ll do so with a smile on their face.

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Andy Rear | chairman

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