By Richard Davies (Cert CII), Client Account Executive at BHIB Insurance Brokers.
BHIB Limited (BHIB Insurance Brokers) is a Chartered insurance broker with offices in Northampton and Leicester. Being Chartered is a status we’re proud of, and the same goes for our independence – it’s one of the many reasons we’ve recently been awarded Investors in People Silver!
My role at BHIB is Client Account Executive, and I’m based in the Northampton office, where we focus on helping SMEs (including larger Corporates) with everything insurance-related.
In today’s blog, I’m going to reveal the dangers of being uninsured.
How is underinsurance defined?
Most businesses only realise they’re underinsured when they put in a claim and don’t receive the pay-out from their insurer that they were expecting. Defining underinsurance is tricky, but there are some common examples.
Take buildings insurance, for instance. In the last few years, the cost of materials and labour has risen, which has directly impacted the reinstatement value of a damaged or destroyed building. This can cause problems from an insurance perspective, because the reinstatement value isn’t what a building is worth on the open market – it’s an approximation of how much it would cost to rebuild it.
The cost of rebuilding an office, shop or manufacturing facility, can rise or fall dramatically in between the initial valuation and a claim being made. This is why we recommend businesses get their buildings valued professionally for insurance purposes every three years.
This enables us as a broker to provide insurers with evidence of a realistic rebuild cost, and results in a far more accurate premium as well as managing the expectations of the insured and the insurer.
Don’t forget your VAT status!
Businesses don’t always consider their VAT status when it comes to insurance claims. If you’re not VAT registered, you obviously can’t claim any VAT, and that means you need to add 20% onto most business insurance premiums to account for the tax. If in doubt, always seek specialist VAT advice from your accountant or tax adviser.
If we look at our buildings insurance example again, a failure to take into account your VAT status will have big consequences. Let’s say a building is insured for a rebuild cost of £1million excluding VAT; if the business that uses the premises isn’t VAT registered, they’ll automatically be 20% underinsured.
It’s simple stuff, but so easy to overlook unless you work within the insurance industry or have the time to consider every possible element of your premium. Few businesses do, which is why companies like BHIB exist!
A wide-spread issue
It’s estimated that as many as 80% of business properties in the UK are underinsured. It’s a huge problem, but one that is often only identifiable if a business owner turns up to work one day and discovers there’s been a fire overnight for which the company’s insurance doesn’t adequately cover the cost of the rebuild.
We speak to a lot of businesses who simply can’t remember the last time they had their building (or assets?) revalued, and when we ask how they arrived at a figure for their insurance cover, they’re unsure.
This is very common, so you shouldn’t feel like you’ve done anything wrong if you fall into that bracket, but I would advise that you get the building and/or assets revalued as soon as possible, just to be sure.
Other examples of underinsurance
Business interruption policies are also commonly underinsured. They’re designed to cover the business if a major event prevents the company from being able to continue to trade, and turn a profit, but few people realise that the insurers don’t rely on the accounting definition of profit to calculate the premium.
Brokers have varying ways of calculating insurable profit, but if you simply provide your gross figure, it’s unlikely to match up with theirs. This is why it’s essential to sit down with your broker and find out exactly what they need from you to calculate the amount of profit that can be insured.
It’s also important to think about how long you have business interruption insurance in place for. Policies like this are often used during the rebuild of business premises, but if the planning stage of the rebuild takes twelve months and the policy only covers you for that period, what happens when the build commences? This is another form of underinsurance that is very easy to overlook.
Let’s think about retail for a moment. If something happened to your business premises today that meant it had to be rebuilt from the ground up, how long would it take to obtain necessary planning consents, engage contractors, resurrect the building and then re-establish the trade you had previously? It’s vital that your business insurance policy considers the time it might take to rebuild not just your shop, but the brand, too.
Calculating these intangible elements is difficult, and the longer a policy lasts, the more expensive it’s likely to be, but because such policies enable staff to be paid and overheads to be settled, they need to be properly budgeted for.
Cybercrime – a growing type of underinsurance
Cyber policies are relatively new forms of insurance but cover businesses for loss of earnings following data breaches and unauthorised network access, as well as providing professional support for damage mitigation.
If your business suffers from a cyber-attack you’ll probably find that your standard insurance policy doesn’t cover it, because the broker will be looking for evidence of physical loss or damage.
This is where a cyber insurance policy is required, and it would cover you for far more than the loss of earnings. Cybercrime is now considered by many to be bigger than the global drug trade, and that puts every business at risk, no matter its size. This is why most cyber policies also include specialist support that can assist with forensic investigations, dealings with the Information Commissioner and the job of improving your cyber defences.
There’s just one caveat with cyber policies. If you’re a victim of funds transfer fraud as a result of cybercrime, your cyber policy may not cover it (although it might help you investigate why the incident happened and advise on how to mitigate against future instances). A crime policy may be required to cover the actual loss of funds.
Public and employer’s liability
Most employers are required by law to insure against liability for injury or disease to their employees. If required, then most insurers offer cover of at least £10million. However, this limit was established a number of years ago, and doesn’t take into account inflation or the emergence of the claims culture.
If you have more than one employee injured in the same incident and they’re all incapable of working for an extended period of time, many businesses will quickly eat into that £10million of insurance cover. The same goes for public liability, which isn’t required by law and often sees cover of less than £10million. If several members of the public are injured in the same incident, such as falling scaffolding from your premises, how far will that £5million of cover go?
This is why we recommend businesses get up-to-date costs for raising their cover limits, if for no other reason than to raise some debate internally, rather than inadvertently continuing with a policy that might not be adequate if the worst happens.
How do I know if my business is underinsured?
The role of the insurance broker has increased significantly in recent years; we have to advise on issues relating to health and safety, risk management, cybercrime and underinsurance to name but a few
It’s very difficult to work out if you’re underinsured. As a broker, we spend a great deal of time looking under the hood of businesses to get a feel for how they operate and where underinsurance might be an issue. We believe our role is to advise and convince business owners to at least give some consideration to the areas in which they might be underinsured.
Protecting your balance sheet, the brand’s reputation and its ability to recover should something go wrong is only possible with the right insurance, and while insurance may not be the sexiest of topics, it could be time to check that your business is adequately covered!
To find out more about BHIB, visit their website by clicking here.
BHIB Insurance Brokers is a trading name of BHIB Limited. Registered office is AGM House, 3 Barton Close, Grove Park, Enderby Leicester, LE19 1SJ. BHIB Limited is registered in England and Wales number: 829660 Authorised and regulated by the Financial Conduct Authority.