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The Hidden Risk of Underinsurance - And How to Avoid It

With inflation at a 40-year high, many UK businesses may be underinsured without realising it. This lack of adequate cover can have catastrophic consequences in the event of a major loss.

In this post, we'll look at what underinsurance is, how it happens, and most importantly - how you can make sure you have sufficient cover.

What is Underinsurance?

Underinsurance occurs when a policyholder's insurance cover is inadequate to fully cover a loss. For example, if your property is insured for £2 million but would actually cost £3 million to completely rebuild after a fire, you are underinsured by £1 million.

Common Causes of Underinsurance

There are several reasons underinsurance can occur:

  • Outdated asset valuations that haven't kept pace with inflation

  • Rough estimates or incorrect calculations of rebuilding costs

  • Insufficient cover limits in the policy

  • Business interruption losses that exceed financial projections

  • Delays obtaining materials or permitting during rebuilding phase

The Impacts of Underinsurance

Should disaster strike, being underinsured can have severe consequences such as:

  • Large out-of-pocket expenses to cover rebuilding costs

  • Protracted business interruption during extended rebuilding periods

  • Complex claims negotiations draining management resources

  • Potential legal action from lenders or leaseholders

How to Avoid Underinsurance

  1. Review policy limits annually - Adjust cover to account for inflation and business changes.

  2. Do a thorough valuation - Hire professionals to provide accurate rebuilding cost estimates.

  3. Mind the cover gaps - Ensure your policy addresses all potential loss scenarios.

  4. Examine policy clauses - Understand provisions like the "average clause" that can reduce claims.

  5. Involve your broker - Work closely with them to structure optimal cover.

  6. Consider inflation clauses - Policies with automatic increases can maintain adequate limits.

  7. Communicate with stakeholders - Lenders or leaseholders may mandate certain cover levels.

Being underinsured, even if unintentional, can put your business (and livelihood) at risk. By taking proactive steps to validate your cover, you can avoid unexpected gaps and ensure your assets are fully protected.

Reach out to Keep Insurance Brokers to discuss your policy - detecting and closing gaps now is far less costly than discovering them later.


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