So businesses have a buyer beware clause in almost all insurance policies that the layman may not be aware of. Its called under insurance or the co-insurance clause.
What is under insurance??
Something that has been highlighted in current news stories is under insurance for homes. Soaring building costs have been identified as the main culprit. The unprecedented flood disasters of February revealed a large number of homes that were destroyed in the floods did not have enough Insurance to rebuild their home to its former glory. The main source of the problem was cost in the building market drastically increased in a very short time and people did not adjust their house SUM insured on their insurance policy to account for the changes. It left many without enough money to complete all the repairs necessary to their house. (Because it was declared a catastrophic event, some policy wording allowed for an extra 30% to be paid to accommodate the the rush on tradies, builders and building materials driving up replacement costs.)
But what does under insurance mean for businesses??
I'm glad you asked!!
It is not the same thing for businesses as it is for home owners. Home owners will still get the entire amount of their Sum insured when a claimable event happens, they will just have to make do with that selected amount. For businesses there is typically what is known as an under insurance or co- insurance clause in the policy wording. Short explanation is - if your SUM insured is less than 80% of the replacement value of your property, the under insurance/ co-insurance clause kicks in at claim time
A working example. Rick has a manufacturing shed. He has plant and equipment used to make PVC elbow joints. Rick business is insured for $500K - That is what Rick tells his broker the equipment and shed is worth to rebuild and he pays full premium on that $500K. But the fact is, the real Sum insured should be valued at $1M replacement value for his Shed and equipment. Rick is only paying 50% on the real cost should a total loss event occur. So essentially he is paying half the premium of what he should have if he were covered correctly. Rick thinks he is saving money. We all applaud Rick for saving money... right up to the moment that Rick has a storm come through that damages his shed roof and allow water damage to all the electrical equipment in the plant. It's not considered a total loss and the $500K he is expecting to be paid out would cover the damage caused in the storm. Rick believes he will be paid out for the total repair cost up to the full $500K.
That is NOT what happens!!
This is straight from the buyer beware handbook
When the assessor comes out to visit Rick and realises that he has damage to the value of $500K but has only paid a premium on $500K instead of the full replacement cost of the business ($1M). From the perspective of the insurer they have only taken premium for 50% of the full replacement value, therefore Rick is deemed as self insured for the other 50%
That means that Rick will only be paid 50% of the insurance claim!! Rick will get $250K from the insurer and be expected to fund the other $250K himself.
This is the reality of not paying premium on the full value of your full replacement cost of your commercial business.
Well Rick now finds himself in a pickle!! Not only does he have to find $250K to complete his repairs, but he will also find it increasingly difficult to get any further insurance for his property until those repairs are completed. Insurers are are unlikely to insure a property that has existing damage. Indemnity condition is a whole other blog.
So our advice is talk to us, your broker!! If you are unsure of the true value of your commercial business, we can put you in contact with a quantity surveyor that can give you an insurance replacement cost valuation. This lets you get on with doing what you do best - running your business. You can relax knowing you have the correct cover in place should you need it.
click the button below for more information on underinsurance with our recommended quantity surveyor