Underinsurance: the elephant in the SME room

PrintYou’ve spent years developing your business, and as far you’re concerned you have all the boxes ticked. So when one of your shops is unfortunately severely damaged, it’s a setback but not necessarily a disaster. After all, you have comprehensive insurance in place to cover just this sort of eventuality – cover for physical damage that also incorporates business interruption cover. Your assets protected, and so is loss of revenue.

However, when the time comes to make a claim you discover all is not right. The true rebuilding cost of the shop is found to be £3million, with an estimated timescale, including site clearance and planning, of two years. Yet you have only insured the shop for the market value of £1.5million, which, after any excess, is the maximum sum that your insurer will pay out.

To make matters worse, you have also grossly underestimated the annual turnover of the business, which you have indicated to insurers is £100,000 – but in reality is closer to £500,000. The business interruption component of cover is also limited to £100,000.

Unfortunately, the above example highlights a problem which is widespread for too many small businesses in the UK- that of underinsurance, a serious problem affecting a wide swath of UK small and medium-sized businesses- and one which it appears that all too many remain unaware of. Quite simply, if a business owner is underinsured for either their physical assets or for the impact of business interruption, their insurers will reduce the claim settlement.

Insurance Act
The issue is made all the more relevant, as one of the most significant changes to the law of insurance in England and Wales happened this year, placing potential underinsurance firmly in the limelight. The Insurance Act 2015 came into force on the 12th August 2016 and, in essence, is intended to create a fairer contract between policyholder and insurer, by imposing new duties for all parties involved in the arrangement of your insurance policies, including SMEs as policyholders.

The intention of the new Act is essentially for SMEs to receive fairer treatment from their insurer in the event of a loss or claim. However, the Act also stipulates that a business as policyholder has a ‘duty of fair presentation’ of their risk.

Why is this important? Well, it means that each SME must disclose every material circumstance they know, or ought to know, and must provide sufficient information to allow a prudent insurer to make further enquiries. Businesses are also required to present their risk in a manner which is reasonably clear and accessible and ensure that every material representation is substantively correct and made in good faith.

Where a fraudulent act has been committed by a policyholder in the submitting of a claim, the Act provides for the insurer to avoid the claim in full, even for parts of the claim which would have been genuinely payable.

Despite the requirements of the new Insurance Act, all too often SME policyholders do not have a clear understanding of the nature of the risks they insure.

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Tailored advice
However, there is no need to panic. As one of the largest corporate and SME insurance brokers in the UK, Towergate Insurance Brokers understands the requirements of business. Through our trusted local teams and our network of experts, we can give substantial access to an extensive range of tailor-made, trade specialist insurance and risk management programmes. We can provide tailored advice to ensure that SMEs are adequately insured, and, in the unfortunate event of claim are not left falling short as a result of inappropriate cover.

To find out more about the perils of underinsurance, contact 01823 625512
or fg@towergate.co.uk or visit our website www.towergatepartners.co.uk/fg

Towergate Insurance Brokers is a trading name of Towergate Underwriting Group Limited. Registered in England No. 4043759. Registered Address: Towergate House, Eclipse Park, Sittingbourne Road, Maidstone, Kent, ME14 3EN. Authorised and regulated by the Financial Conduct Authority.