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The Growing Problem Of Underinsurance And How You Can Avoid It

‘Underinsurance’ is simply when your policy’s coverage is insufficient. It could be because it doesn’t cover the financial impact of an event, legal fees, or the cost of repairing, replacing, or rebuilding the items listed on your policy. It could also be the result of the levels of insurance being insufficient due to your growth or expansion.

Though it’s certainly not a new problem, it is getting worse with rising inflation as the value of assets changes more rapidly. And if your insurance doesn’t take this into account, you could be left picking up some of the bill…

Why does underinsurance happen?

Typically, underinsurance happens when a business’ assets haven’t been properly valued and the policy only covers so much. Aviva recently estimated that 42% of SMEs are underinsured – listing things like the increased cost of building materials as well as plant machinery and equipment among the reasons why.

Another aspect of underinsurance is Business Interruption cover, which involves the time and costs to continue operations or bounce back after a loss of income. For instance, a flood may mean you have to rent an alternative workspace for 18 months; in this case, you’d be underinsured if your Business Interruption policy only includes 12 months’ coverage. Aviva has a great guide to other possible underinsurance scenarios.

Why are fast-growing businesses particularly vulnerable?

The risk of underinsurance is much more prevalent among startups. When a company experiences an exceptional period of growth – by hiring new employees or expanding into new markets, for example – their policies can quickly become outdated, leaving them exposed. Add the rapid growth in business costs and other external factors into the mix, and it’s easy to see why a more considered approach to insurance is needed.

While your business is still in its infancy, it may even seem logical to underinsure your assets – it probably feels unlikely that your property will ever be fully destroyed, after all. But the problem with this is that many insurers will apply ‘the average clause’ to your claim, limiting your total payout based on the amount that you’re underinsured by. The purpose of the average clause is to encourage policyholders to declare the true value of their goods at the time of insuring them.

Photo by Marcin Jozwiak

Steps you can take to avoid being underinsured

It’s critical that you get a professional valuation fit for insurance purposes. Take Business Property insurance. A common mistake is insuring for the market value of the property as opposed to the cost of rebuilding a property from the ground up. Rebuild estimates can include things like car parks, gates, driveways, lighting and fencing – even materials and labour, as well as architect and planning fees, legal fees, and demolition costs.

Index linking then guarantees that the insured value of your assets remains consistent with inflation, deflation, and other factors that impact the cost of living. It doesn’t just apply to buildings, either – changes and developments in the macroeconomic environment can affect the value of other assets, such as stock, equipment, and parts.

Insurance that keeps pace with you – and the rest of the world

We tend to only see insurance working when something bad happens. The rest of the time, it’s all too easy to wonder whether you really need that policy in place and up to date, or if you can manage without it. The answer to this question is always the former – a robust insurance programme protects you against every eventuality.

At Capsule, further to already tracking your business on 300+ data points, regular check-ins are baked into our approach, so we’re especially suited to combatting underinsurance. We’ll keep on top of valuations, check rebuilding and interruption costs, make sure indemnity periods are accurate, and ultimately help you develop a business continuity plan that supports your growth.

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Capsule Insurance Services Limited Festival House, Jessop Ave, Cheltenham GL50 3SH

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Capsule Insurance Services Limited t/a Capsule are an Appointed Representative of James Hallam Limited who are authorised and regulated by the Financial Conduct Authority (FCA), under Firm Reference Number (FRN) 134435. Capsule's FRN is 948838. Registered in England and Wales company number: 13340821. Registered office is 48 Belle Vue Terrace, Malvern, England WR14 4QG.

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