For renewable energy asset owners and investors – material damage and business interruption insurance should provide a crucial safety net, protecting property assets and the business for loss of income against unforeseen events. In the current climate of increasing asset reinstatement values and wholesale energy prices soaring, underinsurance is one of the major risks that is facing the industry.
Research from over 4,800 property surveys that Barrett Corp Harrington (BCH) have carried out this year, over 75% have been underinsured, with an average increase suggested at 53%. Sedgwick reported similar data for the period January 2021 to July 2022 with 85.5% of commercial properties viewed being underinsured with an average percentage increase of 28.4%. Cardinus findings are also similar with 80% of properties being underinsured by an average of over £750,000. In addition, Charterfields note that 42% of plant and machinery locations are being underinsured by more than 50%.1
This insurance gap is not something that any asset owner or investor can afford to ignore, as it can have a significant financial impact if the time comes to make a claim.
The insurer could apply a ‘Condition of Average’, a clause in many insurance contracts that enables insurers to reduce claims on underinsured assets by the corresponding percentage and this doesn’t just apply should you need to completely rebuild the asset. For example, an asset owner claiming £10,000,000 to cover repair or rebuild work after an insured incident could only receive £6,800,000 in settlement if only 68% of the value is covered by insurance.2
Even worse, in significant cases of underinsurance, the insurer could even say that the policy is void as the client failed in their duty of fair presentation under the Insurance Act – and remember, it is the responsibility of the asset owner to ensure that valuations provided for insurance purposes are accurate.2
Day one uplifts lagging behind?
Whilst the majority of renewable insurance policies include ‘day one uplift’ clauses which are designed to defend against the impact of inflation on rebuild costs, it is still essential that declared values are accurate. This clause may provide a false sense of security - as an inflation linked uplift in cover will almost certainly fall short of the actual increase driven by material and labour costs.3
Business interruption claims generally follow a successful property damage claim and as such both the ‘condition of average’ and the ‘voiding of policies’ can also be applied. Given that wholesale electricity prices are currently 194.9% higher compared to August last year4 and wholesale gas prices have increased by 404% in the past 12 5 asset owners who have not reviewed the sums insured within their policies run the risk of being substantially underinsured.
Act now to address underinsurance
With that in mind, asset owners should act now to review insurance policies, paying particular attention to the accuracy of rebuild costs and sums insured for business interruption. We would urge you to employ a specialist renewable energy building valuation company to review your asset insurance value and undertake a full review of income generated, to ensure the accuracy of your business interruption values.
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