This article has been submitted by Towergate Insurance
The Insurance Act 2015 represented the largest change in insurance law since 1906 and came into force on 12 August 2016. The requirements of the Act are exacting and have been created to help you get fairer treatment from your insurer in the event of a loss or claim.
However, the Act also stipulates that you have a ‘duty of fair presentation’ of your risk. This means that you must disclose every material circumstance you know, or ought to know and must provide sufficient information to allow a prudent insurer to make further enquiries. You are also required to present your risk in a manner which is reasonably clear and accessible and ensure that every material representation is substantively correct and made in good faith.
It’s this shortfall between policy cover and reality that has led to problems in the past e.g. In the event of making an insurance claim, if the rebuild value of your property is higher than what you have insured it for, the amount of the claim paid could be significantly reduced.
To help you consider if your business could be underinsured Towergate has put together the top instances when underinsurance occurs, including scenarios relating to both property insurance and business interruption insurance.
- Your cover is based on the market value of the building, but it should be based on the rebuild cost. For buildings, this means the full cost of rebuilding your property including any outbuildings, plus any extra charges that could be involved in rebuilding. When you buy a property, you will have a valuation. However, unless you have a reinstatement cost valuation conducted to help you calculate the sum insured for your insurance policy, this figure could be out of date. The worst-case scenario under the remedies within the Insurance Act 2015 may be that your insurers consider that the rebuilding sum insured you declared to them represented a deliberate or reckless breach and it would be within their rights to void the policy altogether, with no return of premium. In other words, you would have no insurance and no ability to make a claim.
- You haven’t had your property professionally valued for insurance purposes. When you purchased your property, you would have needed a valuation by a suitably qualified professional such as a surveyor. This gives the market value of the property and a reinstatement cost for insurance purposes. Subsequently, the building’s sum insured in your schedule should be assessed at each renewal to ensure the rebuild figure is still adequate.
- You have altered or extended the property. You need to inform your insurer if you have altered or extended the property connected with your business, especially if the change increases the sum insured.
- You haven’t factored in the fact that your property is a listed building. The time and cost of repairs/rebuilds are likely to be far greater than for an unlisted building, impacting your business interruption cover
- You haven’t factored in the costs of professional fees such as an architect or surveyor. The sum insured value will also need to include the cost of demolishing the entire structure, including removing the floor slab and foundations, as well as all professional fees associated with rebuilding such as architects, surveyors, planning experts and so on. It’s important not to underestimate professional fees as these can add up to 15% to the cost of the rebuild.
- You are carrying more stock now than when you took out your insurance policy. As your business grows, it is more than likely that your stock levels will increase accordingly. It is fundamental that your insurer is updated with the changed stock levels. Moreover, it is also important to inform your insurer of stock that fluctuates substantially in different seasons e.g. increased stock during the Christmas period.
- You have purchased new machinery/property since your last insurance renewal. ‘Capital additions’ clause is included in most policies which will allow the sum insured to be increased to take account of property alterations and equipment that may have been acquired since the previous policy renewal. Usually, there is an upper limit on such capital addition. It is essential that you keep your insurer informed of any major pieces of equipment, or new depots or locations that are taken on or acquired after the date of renewal, so that they can be added to the policy.
- You haven’t anticipated future cost levels. Buildings reinstatement values selected at each renewal need to anticipate future cost levels because a loss might occur towards the end of an annual policy term, with subsequent start delays in rebuild caused by planning and tendering processes, and construction phases themselves can be lengthy. Additional costs, need to take into account not just professional fees and debris removal, but also public authority requirements and latest building regulations, all of which collectively can easily generate an extra 20% on top of the pure reconstruction cost.
What’s the solution?
It is vital that you don’t just focus on finding the cheapest priced policy for your property and/or business interruption insurance. It is important to ensure that you select adequate sums insured for all elements of your Property and Business Interruption insurance.
If you are interested in learning more about the options available to your business, contact Jack Lane at Towergate on [email protected]
Towergate is a trading name of Towergate Underwriting Group Limited
Registered in England No.4043759 . Authorised and regulated by the Financial Conduct Authority