By Simon Mitchell
Towergate
I WROTE an article in December’s issue of Business Times about research by the Royal Institution of Chartered Surveyors. This research estimated that 80 per cent of commercial properties in England and Wales are underinsured.
I also wrote that following a review of commercial insurance claims*, the Financial Conduct Authority revealed that nearly 25 per cent of the business interruption claims examined involved the period of loss exceeding the insured indemnity period. In many cases this would leave businesses without the cash to see them through to full recovery.
Common reasons for underinsurance include no provision for items such as foundations, gates, fences or car parking areas, and site clearance and professional fees incurred. Access to damaged buildings, as well as the need to comply with local authority and other legal requirements, can increase costs. This can also delay repairs and lead to insured indemnity periods for business interruption being exhausted before a property is fully reinstated.
A worrying development over the last 12 months is inflation. The Monthly Statistics of Buildings Materials and Components (No 509), available from the Department for Business, Energy & Industrial Strategy, show that between June 2012 and 2016, there was little or no inflationary pressure on rebuilding costs. In the 12 months to June 2017, these same statistics show an increase of 4.7 per cent. The UK Producer Price Inflation statistics issued by the Office for National Statistics show an increase in input prices for imported equipment of 7.5 per cent in the 12 months to June 2017. Adjusting insured values to keep pace with inflation should be considered on a regular basis. This should have due regard for imported replacement machinery and parts.
Underinsurance is not just restricted to property and business interruption insurance. Following changes earlier this year in the investment rates used to calculate compensation for serious life changing injury claims, many businesses may find themselves underinsured. The general rate used has changed from +2.5 per cent to -0.75 per cent per annum, a change of +3.25 per cent in total. Taking into account compound interest over many years, this will have a big impact on pay outs. Based on the Ogden Table 1 (Multipliers for Pecuniary Loss for Life), a man aged 40 with an award assessed at £100,000 per annum, would see an increase £2.6 million to £5.5 million.
This increase does not include legal and other costs associated with these complex claims, which could add significantly to the final cost. The advice to all company directors and business managers is to look carefully at the adequacy of current liability limits of indemnity across Employers’, Public and Products liability insurance risks.
All of this shows just how important it is to get it right before anything goes wrong. For a copy of a Towergate client briefing on underinsurance and the changes in the Ogden rates, with helpful tips on how to avoid the pitfalls and access to a specialist insurance valuation service, contact Simon Mitchell, Account Director, Towergate Insurance, Northampton 01604 887325.
Simon is a Chartered Insurance Broker with more than 30 years’ experience and a wide range of knowledge about insurance for business. This includes specialist advice about emerging risks such as cyber crime and terrorism.
*Source: BIBA, Professional Indemnity Volume 6: Managing Under-Insurance – A guide to prevention. 5th May 16.