The aftermath of a crisis is traumatic enough, without having to face the grim reality of an invalidated or partially paid insurance claim. But unfortunately, if you haven’t answered questions accurately, or failed update the insurer with important information, this is precisely the situation you could find yourself in.
Sharon Theobald, Claims Consultant at Alan Boswell Group, has more than 25 years’ experience in loss adjustment and insurance claims. She knows all too well just how big an effect such mistakes can have on a business and its owners.
One of the most common slip-ups is underinsurance. “Misunderstanding the value that property should be insured for can bring significant problems if the business owner needs to claim on his or her policy. For example, if a building is insured for £250,000 but it will cost £500,000 to rebuild, the insurer will only pay 50% of the claim because the policyholder is 50% underinsured,” Sharon explains.
A smaller claim may have minimal impact on a business – for instance, an escape of water that costs £1,000 to resolve would only require the policyholder to pay £500 towards the full cost if s/he is 50% underinsured. But a larger claim could plunge the business into serious financial difficulties. Imagine a significant fire breaking out at the premises, which leaves £200,000-worth of damage to repair. If the insurer will only pay 50% of the cost, the policyholder would have to find £100,000 to contribute before any rebuilding could begin.
“And it isn’t just buildings where we see underinsurance,” Sharon adds. “Stock, contents, machinery and business interruption all need careful consideration to ensure the sums insured are adequate.”
The terms and conditions that are attached to insurance policies are also frequently overlooked or unobserved by businesses, leading to invalidated claims. “Such endorsements include a minimum security clause, which will indicate specific requirements for locks and alarm systems; and waste conditions, where oil, greasy waste and cloths must be kept in metal receptacles with metal lids, often outside the building. Your insurance broker should highlight these points to you, in order to ensure that they’re not missed,” says Sharon.
Your insurance broker should highlight these points to you, in order to ensure that they’re not missed
“I’ve seen many instances where these requirements have not been passed down to staff to ensure correct practices are carried out daily; but ultimately, an insurer could avoid paying a claim if an endorsement is not complied with,” she continues. “For example, if the spread of a fire has been exacerbated by the inappropriate storage of oil and greasy waste, the resulting insurance claim could be declined. Endorsements are there to minimise risk and prevent loss.”
Needless to say, policy documents and Ts&Cs must be read carefully, but how else can you avoid making any costly mistakes when applying for and operating under a business insurance policy? And how can you make sure that, in the event of a claim, the recovery period is as smooth and quick as possible?
Firstly, says Sharon, it’s all about good record keeping, regularly backing up computer systems (both on and off-site), and having a robust business continuity plan in place, to ensure no ground is lost if disaster strikes. But a business insurance policy that provides adequate coverage for your needs and is based on accurate information about your business is also essential.
Buildings should be insured for their rebuilding cost – taking into account external walls, paving, driveways, fences, outbuildings, professional fees (for surveyors and architects etc), and debris removal, which can often include asbestos, especially for farm buildings and business units.
“Get your buildings surveyed by a RICS-qualified surveyor who is best-placed to give adequate rebuilding costs,” Sharon suggests. “If your property is valued every three years by a RICS surveyor, some insurers will agree to settle your claim in full, even if you are underinsured at the time of a loss. This scenario is, of course, less likely to happen if you have regular surveys, but rebuilding costs do fluctuate year-on-year – and who knows what Brexit will bring!”
Stock must also be accurately valued, although policies are available that allow for seasonal fluctuations. Meanwhile, for machinery, plant and all other contents, including smaller ancillary items that are often missed, Sharon recommends consulting asset registers. “These usually allow for depreciation, but don’t forget that your sum insured should reflect the new-for-old replacement cost,” she adds.
Dealing with business interruption
Then there’s business interruption insurance to consider. This should cover your gross profit – in other words, the profit you make after deducting the costs associated with your sales.
“Importantly, the sum insured should include the cost of wages, so that you can continue to pay your employees throughout the claim. They are among your most valuable assets and you will need their help to recover from a disaster,” Sharon points out.
“It’s advisable to have an indemnity period of longer than 12 months,” she adds, “because if, for example, you suffer a significant fire, which could affect you for up to a year, a longer indemnity period will ensure that your gross profit is still paid while your customers return and your business recovers to pre-loss levels.”
A longer indemnity period will ensure that your gross profit is still paid while your customers return and your business recovers to pre-loss levels
With so much at stake, consulting an independent adviser about your business insurance can provide much-needed peace of mind – as well as making sure your assets are properly protected.
“Insurance policies are often referred to as having ‘small print’, but an experienced insurance broker will fully understand the policies he or she is selling, and will be able to negotiate with insurers and loss adjusters to get the best deal,” says Sharon. “Then, when it comes to making a claim, an adviser who understands the process can provide so much reassurance. After all, regardless of the size of the loss, an insurance claim can feel quite daunting.”