Business Insurance – The Risk of Under-Insurance

Apart from the obvious risk of not insuring your business assets for full replacement value, an additional risk lurks in the fine print of your business insurance policy. The clause I am referring to is generally called an “Under-Insurance” or “Co-Insurance” clause.

It’s a difficult clause to explain, and I do recommend you refer to your policy wording for worked examples, however the general provision of the clause allows the insurance company to only pay a percentage of a claim in the event your business is under insured.

For example, lets assume the full replacement value of your building, stock, and contents is valued at $500,000 and you have it insured for $350,000. In the event of a total loss your insurance company will not pay you the full insured amount of $350,000. They will apply the “Under Insurance” clause, do some calculations and when it’s all worked out, you may only get $200,000. This scenario could prove disastrous when trying to get your business back up and running!

A few common areas that businesses do not take into consideration when working out the sum insured for their building, contents and stock include;

  • Inflation: The cost to replace your building and contents goes up every year. Over a ten year period, the cost to re-build your property when you take into consideration rising costs of material and wages could be vastly different. It’s important to keep an eye on your sums insured and make sure they are relevant in today’s prices.
  • Removal of Debris: In the event of a fire or a major storm, there will be debris left behind. Before work can begin on repairing / replacing this debris must be removed and disposed. This cost can add up to significant amounts.
  • Extra Costs of Re-instatement: Council regulations may have changed since your property was originally  built. There may be a number of design and/or structural changes required to your property that can add significant costs to the repair / rebuild project.

I hope you have found this blog entry informative. We welcome any feedback or questions you may have. Please feel free to contact us if you would like help with your business insurance.  All our insurance brokers have years of industry experience, are highly qualified and draw on a national resource pool.