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Underinsurance Factsheet

A recent insurance industry study has highlighted that a shocking 85% of commercial properties are considered to be underinsured, leaving those businesses potentially vulnerable to risks.

At P & W Insurance Group our aim is to help you protect your assets and avoid the pitfalls of underinsurance, this being especially relevant in the current economic climate as increased rebuilding costs can easily result in insurance values lagging behind.

The facts:

  • 1. In late 2022 average annual inflation rose to just over 11%, a 41 year high.
  • 2. According to the BCIS (Building Cost Information Service) average rebuild costs have overtaken average inflation, rising a massive 19% between 2022 to 2023.
  • 3. Rebuild time frames are suffering due to shortages of construction industry workers, with certain trades seeing more than a 50% labour deficit.
  • 4. The cost of construction materials outstripped average inflation, with 25% being the comparative increase.
  • 5. The cost of fabricated structural steel has risen by even more, an increase of just over 70% being seen since 2020.

How you can minimise the risk?

In a challenging supply chain environment, with high inflation, the risk of underinsurance for both property and business interruption cover should be evaluated at regular intervals during the period of insurance.

Regular professional valuation

At P & W Insurance Group we recommend a professional valuation every 12 months. This will consider various factors such as labour shortages, building size and height, location access, any basement or sub-grade areas, construction, contamination risk, working hours restrictions, historical importance or heritage listing, nearby railways or rivers, and planning permissions etc. By staying informed and proactive, businesses can ensure that they are fully covered and prepared for any eventuality.

While indexation increases can help counteract the impact of inflation, sums insured must be adequate to cover potential losses.

P & W Insurance Group can arrange for an RICS desktop Rebuild Cost Assessment Report to be undertaken, often for as little as £152 (inc. VAT). If a desktop valuation is not possible we can instead provide a very competitive quote in respect of a premises based valuation.

Average Clause

The application of the 'average clause' means that in the event of underinsurance being determined, any claim pay-out will be reduced by the percentage of underinsurance seen.

It should be noted that an average clause applies not only to buildings but also to vehicles, tools, contents, and tenants improvements etc, and so carrying out a professional valuation every 12 months is highly recommended.

Ultimately, underinsurance can have catastrophic consequences for a business, including loss of revenue, disappointed customers and supply chain problems, making it challenging to survive and recover. It is therefore of paramount importance to ensure that insurance values are correct.

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