Managing the risk of under-insurance

Oct 25, 2016

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Under-insurance is a common problem faced by many charities and businesses. In this guest blog James Hill of Access Insurance explains how charities can manage the risk of under-insuring property and other assets.

In a recent report, BCIS (Building Cost Information Service), part of the Royal Institute of Chartered Surveyors (RCIS) estimated almost 80% of commercial properties could be under-insured. While one surveying firm found 77% of properties they surveyed were under-insured by up to 45%.

What is the impact of under-insurance?

A claim for damage to buildings or contents could be reduced if you do not have adequate amounts of cover. The same applies to claims for consequential losses following a buildings claim (charity interruption cover).

The correct buildings cover is the total cost of rebuilding your property. The figure should include a cost for debris removal, professional fees (such as architect and surveyor fees), materials, labour and, where applicable, VAT.

What can you do about it?

The best and only accurate way to ensure you have the correct sum insured is to appoint a surveyor to calculate your ‘rebuild cost’. Get a professional surveyor to visit your premises and produce an insurance valuation report. Some insurers offer this service for free, or at a reduced rate, for their charity customers.

It is worth noting that often a rebuild sum is very different to the value of the property. The value could be higher, or lower, than the cost of rebuilding your property.

To calculate the correct amount for contents and equipment, keep an up to date inventory (sometimes called an ‘asset register’) of items, with the cost of replacing all items as new.

Some organisations, rather than insuring for the full amount of their contents, decide to insure for the amount they think could be lost in any one claim. For larger charities, with multiple locations, this may be appropriate when a more bespoke policy is arranged. However, for most charities this approach is simply not appropriate and could put them in financial danger.

What is an 'average' clause?

Some organisations have mistakenly believed that as long as the amount of any claim they suffer is within the sum insured all will be fine. Sadly, this is not the case. This is due to the vast majority of charity insurance policies having an 'average' clause. This clause details the proportional reduction in a claim payment if a claim is made but the sum insured is not adequate.

Take a charity with a community centre for example. The correct building sum insured is £1,000,000, but they decide to insure for £700,000. The community centre suffers from flooding which leads to a claim of £200,000 to repair the damage caused. Because the charity decided to under-insure by 30% the claim payment would also reduce by 30%. Instead of receiving the £200,000 the charity would only receive £140,000. Average clauses generally apply to all material damage and consequential loss cover (i.e. buildings, contents, equipment and business interruption).

More information

Guidance on how to insure your charity and when it is required by law is available from the Charity Commission.

Making sure you are properly insured is vital. You need to be confident if you make a claim that you are appropriately insured.

James works for Access Insurance’s Business Development Team. His role means that he has experience in dealing with a huge variety of individual charities, as well as assisting member-based and umbrella charities to put in place suitable insurance schemes. James enjoys working closely with organisations to identify suitable and cost-effective insurance solutions that work for them.