Howden UK Corporate advise on how to avoid the underinsurance trap
Underinsurance, or taking out less cover than is required, can be an expensive problem for manufacturers.
If you need to make a claim on a building or asset that isn’t adequately insured, then it might not be paid out. Or, you might only receive a percentage of the claim, as the insurer could apply a technique called averaging, meaning it can reduce the settlement by the same percentage the asset is underinsured.
But underinsurance is surprisingly common for businesses of all shapes and sizes. In a recent set of 450 insurance valuation surveys conducted by Barrett Corp & Harrington (BCH), the UK’s leading supplier of buildings insurance valuations to the UK insurance market, 84% of surveys showed the property owners were underinsured.
The situation has got worse amid the recent disruption to supply chains, with a scarcity of essential building materials, labour shortages and an exponential rise in costs.
For manufacturers, it can be a particularly complex challenge to ensure that all assets are properly insured. These include:
Your premises may be your most valuable asset, and essential to your business.
In contrast to the market value of a property, an insurance valuation refers to the cost of rebuilding a property, which would include costs not covered by a market valuation, such as materials and labour. It also includes the costs of demolition and removing debris for the old property, as well as architects and planning costs. So a building’s rebuild cost could be higher than its market value, especially if it is made of non-standard materials or has specialist architectural features.
Tax is an important consideration too. If, as the building owner, you are unable to recover VAT, then the tax liability needs to be included in any reconstruction or reinstatement costs.
Raw materials, stock and contents
Do you know how much your raw materials, stock and contents are worth? How about at peak trading? This is another vital part of your insurance calculations.
Some insurers will offer cover on a new for old basis, in which case you’ll need to calculate accurate replacement values for raw materials, stock and contents. Base this on the maximum value at risk during seasonal or other peak trading periods for your business.
Other insurers will provide cover on an indemnity basis which means putting you back into the position you were in before the claim.
If, like other businesses, you’ve increased stock levels in response to the current supply chain disruptions, then let your broker know.
Plant and machinery
Whether you own or hire your equipment, it’s another essential part of your business. Like stock and contents, you may need to calculate accurate replacement values.
The right sum insured
So, how can you ensure that all of your assets and properties are valued correctly?
For contents, you’ll need an up-to-date inventory of all your business’s contents – this should include everything in the premises, including any customer goods. As noted above, it should reflect peak stock levels.
For property, the most accurate way to value your premises is to arrange a RICS-compliant Reinstatement Cost Assessment (RCA). This involves an expert visiting the property to estimate its insurance rebuild value.
It’s normally recommended that this is carried out every three years. But, if you haven’t had this type of assessment done in the last six months then due to recent events, insurance brokers are recommending that this is done now. If changes are made to the building or its use, a further valuation may be needed.
Similarly to buildings, valuing plant and machinery accurately requires specialist expertise. If you have a lot of equipment and depend on it for your day-to-day operations, then it’s especially important to conduct regular professional valuations.
Help is at hand
Howden have been Make UK’s insurance partner for 15 years. We want to help our manufacturing clients in ensuring their properties and assets are properly valued, and are correctly insured as a result.
We offer all our clients, regardless of the size of your business, an advised sale, meaning that we use our manufacturing expertise to advise you on the best insurance for your needs, and we support you every step of the way when taking out insurance and making claims.
To find out more about how we can help, contact the specialist Howden team. Call 01234 230275 or email: [email protected]