Underinsurance is a simple concept but one with a sting in the tail that could cripple a charity. John Cleghorn, account executive at commercial insurance broker and risk management specialist Gallagher, identifies the trips, traps and advice to enable your organisation to avoid this risk.
Underinsurance is where the policyholder has inadequate insurance coverage that may cause serious financial losses in the event the amount claimed exceeds the maximum that can be settled by an insurance policy.
Despite the clear risk here, the threat of underinsurance is often ignored, due to a combination of factors, including an attitude of treating insurance as a box-ticking exercise. For smaller charities under time and resource pressures, top-to-bottom audits can be perceived as both disruptive and something that could lead to an increase in annual premiums.
How can underinsurance affect your charity?
Business interruption: this is the specialist policy that supports your organisation following a major event – for instance, a catastrophic flood or fire – and covers the financial assistance you may need, including, for example, the cost of renting temporary premises. To work properly, it requires a thorough and up-to-date assessment of both the time and resources you need to achieve pre-loss turnover levels.
Property: this is the simplest manifestation and relates to the inaccurate insured value of items like your premises and other infrastructure. It’s usually caused by out-of-date, estimated or incorrect valuations. Another common mistake by businesses is to insure property and premises for just the market value when the sum insured should be the rebuild cost.
Stock: it’s important for you to keep a full and regularly updated list of all stock, as the figure provided will be used to calculate the insurance cover. If you’re carrying more stock than you have told your insurer, it may lead to a gap in the pay-out.
How can charities prevent underinsurance?
While the risk that underinsurance poses can be hidden, the solution for identifying and removing it comes down to embedded processes, good habits and regular review. Make sure you let your broker know about any changes to your business.
Ask them to help you conduct audits or valuations to understand whether your cover is sufficient for your needs and what professional help may be available.
Rebuild: your overall sum insured is the most you would need to rebuild and replace from absolute scratch.
Limits: are the policy limits insufficient? Check them against the needs of your organisation.
Values: update the new-for-old replacement of plant, assets and premises for your organisation annually.
Recovery: set a realistic indemnity period within business interruption insurance that gives your organisation enough time to recover. Your sum insured should reflect the anticipated business growth and not just past performance.
Review: an annual review of all relevant policies with your broker, based on your changing valuations will ensure you have the strongest and most effective cover available.
Inflation: always check your insured sums have automatically been index-linked to inflation. Your liabilities at 2017 rates will differ to those in 2018.
Designing underinsurance out of the equation is all down to robust, regular assessment processes. Do the detail work with your broker to make sure you have a clear, in-depth picture of cost, value and liability that is current, accurate and therefore able to support effective, properly funded insurance.