The cost of underinsurance
When taking out business insurance to protect the value of your tools, commercial assets or any claims made against your work, you are asked to declare an ‘insurance value’. This is the value up to which your insurer is agreeing to cover in the event of financial loss.However, if you declare a value lower than the real insurance value, you could find that you won’t be covered for the full sum of your loss and may even have to pay an excess fee.
In the event that you need to claim in excess of your insured value, your insurer may use Average Conditions to calculate your pay-out. However, not all insurance policies carry an Average Condition, so it’s worth checking your policy. Look out for phrases like “average”, or “underinsurance” and make sure you understand their impact on your policy before you sign.
So, what are Average Conditions and why do they matter?
‘The Condition of Average’
When you take out a policy, your insurer is agreeing to cover you for the agreed ‘insurance value’. This value is then used to calculate your insurance premiums. If the value you declare is lower than the actual sum of your loss, you won’t have been paying the right level of premium to cover that loss.This is where the Condition of Average comes in.
The Condition of Average is there to make sure you get the correct pay-out based on the premium you’ve been paying. This means that if you are only insured for 50% of your loss, you will only get a pay-out for 50% of your original insured value.
50% of contractors including, builders, plumbers, roofers and electricians are not adequately insured to cover their losses.2
Example:
The tools you use for your business currently total £5k, however you are only insured for £2,500. Unfortunately, you suffer a theft and number of your tools are stolen.
Your insurer agrees to pay you in line with the Average Conditions agreement in your policy, minus any policy excess fee that you’ll pay them.
This means that if you claim £2,000, your insurer is only obliged to pay out according to the following;
- £2,500 sum insured is 50% of the actual £5k value of the tools
- The insurers would therefore pay out 50% of the £2,000 loss = £1,000
- Less your £300 excess
- Total insurance pay out: £700
In this example you would be left with £1,300 worth of tools to replace from your own pocket.
As you can see, underinsurance can come with a high-price tag in the event of a claim, leaving you unexpectedly short when you need it most.
It’s important to make sure your insurance value is in line with the real value of your assets and to update this value regularly to make sure your cover is always valid.
Sources:
1 https://www.fsb.org.uk/first-voice/could-your-business-be-under-insured
2https://www.electricaltimes.co.uk/underinsured-builders-cost-homeowners-40k/
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