Though most business have insurance for their buildings and contents in place, far less actually have the right level of insurance in place. In fact, according to a report conducted by the Building Cost Information Service (BCIS), as many as 80% of commercial properties were underinsured. This is significant as due to something known as the ‘Average Clause’, an underinsured property will only ever be receive an insurance pay out equal to the correct percentage it is insured by, regardless of how big or small the claim is.

This means that if you have insured your factory for £10 million but it is actually worth £15 million then you are underinsured by 50%. If you then suffer storm damage and make a claim on your insurance for £2 million then you will only receive 50% of this amount, in this case £1 million, even if the amount you are claiming for is significantly less than the total amount you are insured for. £1 million might be better than nothing but it is still £1 million shy of covering the damage you have sustained, leaving a £1 million gap in your finances when you might have assumed you were fully covered.

There are a couple of major causes for underinsurance. The first is that a business was simply not correctly valued at the time an insurance policy was taken out. The second, more common, cause is that the value of a business has changed over time but the insurance cover has not been adjusted to reflect this. Renovations, new equipment and shifting property values are all things that can cause the value of a business to increase and also cause a previously sufficient insurance policy to no longer be effective.

It’s fairly simple to avoid the problem of underinsurance. By simply talking to your broker or insurer whenever you make significant changes to your business (building an extension, purchasing expensive new equipment or machinery) to make sure that your cover reflects these changes. It’s also important to get your business valued regularly so you aren’t caught out by other aspects such as changing property or land values.

If you’re not sure if your insurance correctly covers your business, get in touch with the team at Thorntons today and we’ll help advise you on the suitability of your cover.