Major loss events reveal underinsurance dangers
A major loss incident, such as a fire or a flood, can highlight the perils of underinsurance at the worst possible time – usually when it’s too late to do anything about it.
And underinsurance is a growing problem. It may occur because a firm’s assets have risen in value without them fully realising or because a firm has underestimated the value of their assets.
Underinsurance left specialist manufacturer in ashes
After a fire at a manufacturing plant, the initial cost of the claim by the manufacturer was estimated to be over £25m with the possibility of further increases.
During the investigation by Zurich, it was revealed that previous inspections by a different insurer had failed to highlight certain risks, including underestimation of mitigation costs, lack of insurance to cover future losses within the indemnity period and specialist machinery replacement issues.
As such, the loss estimate was outside the expected estimated maximum loss. All of this led to a business interruption loss of over £14m.
Underinsurance occurs when a business and its assets are valued and insured at less than their true value. A common mistake many companies make is not realising the real worth of items like stock and specialised plant.
Unfortunately, ‘unforeseen’ events can happen at any time. But when they do, companies must ensure they are prepared.
For instance, the inclement British weather has been a growing cause of major loss in the past decade or so and extreme weather can strike, seemingly, at any time. From the snows in 2012/13, which affected most of the country, to the floods in 2013/14, which, too, left many parts of the UK under water, it seems that these events are on the increase.
It is not just tangible assets that are being undervalued. Business interruption underinsurance can arise for a number of reasons, including because a firm has incorrectly calculated its gross profit or revenue, because it has not selected the appropriate expenses to insure or because they have chosen an inadequate indemnity period.
According to the Chartered Institute of Loss Adjusters, as many as 40% of business interruption policies are underinsured, with the average shortfall running to 45%. This highlights just how far off the mark some companies are when calculating the level of insurance they need.
Although major loss incidents are thankfully rare, when they do occur the damage inflicted upon businesses can be grave.
Real Insurance Solutions can help to manage the impact of these kind of events, by offering advice on how to have the correct sums insured for both property and inventory, the right amount of business interruption cover and critical insurance for vital plant and machinery.