The correct level of insurance protection is critical to safeguard your business or personal financial position. Our industry is littered with cases of "under-insurance" (as it is commonly known) causing real issues for both commercial organisations and private individuals. Whilst "under-insurance" has historically frequently been an issue, the implementation of The Insurance Act 2015 imposes an even greater responsibility on you to ensure that the risk information you provide to insurers is "fair" - this has particular relevance to sums insured and/or estimates which insurers use to assess the risks they are covering. Be aware that there is a real focus by insurers on issues such as this - their view is that the Act is very much a "two-way" process.
It is important to appreciate that "under-insurance" is not just a problem confined to the realm of physical property cover. Whilst this has certainly been a common cause of cover issues, the problem can apply to many other types of insurance cover. This bulletin is not intended to provide an exhaustive list of those cover types, but we can highlight areas such as;
- Financial and Economic Loss (this will include the likes of Business Interruption, Loss of Rent, Fraud and Cyber Risks)
- Legal Liability (including Employers', Public/Products, Professional Indemnity, Directors' & Officers' etc)
- Benefit covers (like Travel, Personal Accident, Keyman etc).
Essentially, any kind of insurance policy which relies on a sum insured, set indemnity period, limit of liability, or benefit limit presents the potential for "under-insurance" - that just about includes all policies!
Each kind of insured item, liability or benefit requires a particular type of assessment as to what the relevant cost to you might be. There are two areas of effect:
1. Where there is an implication in respect of the application of full policy cover, e.g. the selected sum insured/estimate does not represent the actual value
2. Where policy cover is exhausted below the loss level, e.g. your £2m liability limit falls short of the £3m claim
Essentially, the first area of effect is one where the tools or means to assess what the correct sum insured/estimate actually is are available to you. To achieve this, it is necessary to understand the basis upon which cover is provided. For example, a building will normally be insured for its reinstatement value - this means the cost of actually rebuilding in the event of total destruction, including all fees and ancillary costs. This usually bears no relation to the market value. Because of the variation in potential costs (e.g. location, type of construction, etc.) a professional rebuilding cost valuation is the recommended solution. Each sum insured/estimate should be treated in similar fashion - the correct figure may often be known to you, or available after research.
The second area of effect, whilst not necessarily impacting on the amount payable under your policy, is where you need to assess your exposure, sometimes more theoretically. As an example, is the indemnity period under your Business Interruption cover long enough to ensure that you can adequately return to normal trading levels? An FCA review from 2015 found that in 25% of SME claims examined, the indemnity period expired before this was achieved. Similarly, a low level of indemnity on a Public Liability policy may not reflect either the risk you present, or the levels of personal injury awards we now see in the Courts.
Every insured item, liability or benefit requires your careful consideration, please speak with us for further guidance where needed.