You get what you pay for

08 January 2016

There is a perceived wisdom that ‘quality costs’ and that ‘you get what you pay for’. However, all too often this is overlooked when purchasing insurance products. James Shaw, of insurance broker Darwin Clayton, highlights the risks of insufficient cover and the steps to take to avoid being underinsured when disaster strikes  

The recent bad weather and resultant floods have brought the issue of insurance to the fore in many people’s minds, especially where it looks as though they won’t receive the pay-outs they expected. Businesses’ insurance premiums are calculated based on individual circumstances and the amount of cover chosen. So, if the amount of cover taken out doesn’t match the amount needed when making a claim – for example following a fire or flood – the business is said to be ‘underinsured’. If this is the case the pay-out won’t cover the full cost of repairs or replacement, leaving the business to make up the shortfall.

Underinsurance can have significant consequences, from the inconvenience of unexpected bills affecting cash flow to the extreme of businesses having to close. 

Property values

The first aspect to consider is the value of your property. Crucially, this needs to be the amount it would cost to rebuild it if necessary and not just the current market value. As property prices have on the whole risen, your property is probably worth more than you paid for it, but you mustn’t let this give you a false confidence about the amount you’ll need should anything catastrophic happen. 

To ensure you are sufficiently covered, you should have your property professionally valued every three years to ensure that any significant changes are identified and included in your premiums. You should also make sure you notify your insurer or broker of any alterations or extensions to the property as these are likely to affect its value. 

If your property is a listed building, then it is likely to take longer and be more expensive to repair or rebuild than standard buildings. The increased repair or rebuild time could have a significant knock-on effect on the time your business is out of action so you’ll need to increase your business interruption cover to make sure your business doesn’t lose out. 

Exterior costs 

Depending on the event that has led to your insurance claim, you may need to repair or replace a number of exterior elements such as gates, fences, car parking areas and the like. These should be built into your insurance assessment. 

What’s inside?

It is important to consider the contents of your property as well as the building and surroundings. Has anything changed since you took out your insurance policy or it was last reviewed? If you purchase new equipment you should inform your insurer/broker. Similarly, if your business is growing, you may have more, or higher value, stock and need to ensure its value is recognised. Otherwise your machinery, stock and business interruption cover may be insufficient. 

Project costs 

The repair and rebuild will incur additional costs that need to be considered for insurance purposes. Heavy machinery may need to be hired to clear any rubble or debris. There may also be access issues which could add to the time that works take and affect your business interruption cover.

If you have to rebuild or carry out major renovations, you are likely to require the services of an architect or surveyor. Their fees will need to be considered when setting your insurance premiums. 

VAT status

An additional consideration is that your businesses’ VAT status affects the insurance pay out as insurers will normally pay the policy holder compensation exclusive of VAT. 

Good communication

As with most aspects of life, it is important to communicate clearly and regularly with your broker or insurer to let them know about any changes affecting your business. They can help you understand the cover you need and the professional help that is available, so that if the worst happens, you know you’re properly covered.