Imagine the worst happens to your business. For whatever reason, your property is so badly damaged your ability to operate is compromised. It’s at this stage your property damage (PD) and business interruption (BI) cover might kick in. Alongside your business continuity plans, this coverage is designed to restore your property and put your business back where it was before catastrophe struck.
But what happens if when you call on the cover you purchased for peace of mind, you discover you’re significantly underinsured? This could leave you facing penalties or your cover being rendered void, undermining the chances of the business ever getting back on track.
Unfortunately, this is just the type of scenario we’re seeing an increasing number of businesses tackling recently, which is why we’re urging our clients to review both their PD and BI policies as a matter of urgency.
Businesses claiming on their PD and BI policies are finding quotations on property repairs, the cost of replacing equipment, and also clearing the debris and other professional services needed to get the business operational again, significantly more than was expected.
Reinstatement and rebuilding costs have risen well beyond what businesses might consider ‘normal’ inflation. This is down to a wide range of factors, including supply chain issues that are leading to material shortages and delivery delays, prompting significantly increased material costs. In addition, worker shortages are forcing up the cost of labour, and demand exceeding supply is leading to backlogs which in turn are creating wider windows for inflation to grow costs overall.
All of the above means reinstatement tenders from contractors may be significantly higher than you have currently budgeted for in your insurance policies.
In addition, timelines on repairs and recovery are also considerably longer than was planned for when many organisations set periods of indemnity on their BI cover.
If a business is accidentally or unintentionally underinsured by a marginal amount, the claim may still be paid in full, though only up to the policy limit, which will be inadequate if the premises are a total loss.
Typically, if the sum insured is below 85% of the value at risk, it is likely either the basis of settlement will revert to ‘indemnity’ or, depending on the policy conditions, it is more likely the pro-rata condition of ‘average’ would apply. This is where the value of any claim, however large or small, would be reduced in proportion to the underinsurance.
There are numerous provisions around underinsurance within the Insurance Act 2015, including dispensation for insurers that consider the declared rebuilding sum insured represents a deliberate or reckless breach to void the policy altogether. This scenario could play out if, for example, the sum insured is less than 50% of the value at risk.
It’s worth remembering the sum insured for buildings, contents or business interruption is not a policy limit. Insuring only the amount you believe you may claim at any one time is not a solution to reduce premiums because the business will face penalties for notable underinsurance.
The likelihood is, if your premises were valued more than 18 months before the current year of insurance, regardless of index-linking, you could be at high risk of underinsurance and shortfall in the insurance recovery. This could also be the case regardless of the size of any loss.
It’s important to consider the realities of the costs of reinstatement when arriving at the correct declared value which is sufficient to include these costs.
When it comes to BI indemnity periods – the maximum length of time your business is paid by your insurer – some businesses are still setting them at as little as 12 months. This was often too short a period even before recent factors that are stretching reinstatement timelines, but with the current pressures a year can prove an inadequate window.
Some organisations set shorter indemnity periods driven by the desire to save money on premiums, but this may prove to be a false economy. This is particularly true given it is not usually the length of the indemnity that drives premiums so much as the limits.
To put it another way, a policy with a £100 million limit with an indemnity period of 24 months is unlikely to be twice the cost of a policy with the same limit and a 12-month indemnity.
What businesses may not realise when setting both their indemnity and their limits is that it won't matter say if, for example, you've only managed to use half of your limit after 12 months. The way indemnity periods work mean on day 366, all further losses become uninsured.
Remember, under a contract of insurance, the onus is upon the insured to ensure the adequacy of sums insured.
While WTW can’t advise on the values themselves, because of the issues we’re seeing some organisations face we’re encouraging you to speak to your WTW contact. They can guide you on the specific next steps your organisation may need to take to ensure you have correctly declared values for both the physical damage risk and business interruption.
Without adequate PD and BI cover, businesses may be unwittingly compromising their long-term resilience.
To review your property damage or business interruption cover, get in touch.
