When fire strikes it is too late if you are under insured
The terrible fire that devasted Notre Dame Cathedral, and closer to home the fire that ripped through the former clubhouse of North Worcestershire Golf Club, are a timely reminder to us all to ensure that your property assets are not under insured.
Build costs have spiralled in recent years and many buildings, both residential and commercial, are under insured.
When disaster strikes, the financial and disruption costs can be significant. In some cases, they can be sufficient to close a business that did not have sufficient insurance in place or the financial resources to ride out the problem.
In the minds of many business owners, it is enough to know that there is insurance in place, but how many have looked at the real value of their insurance recently, or have it logged as something to check on an annual basis?
Insurers include a condition in their policy which allows for a reduction in the amount paid out if the true value of reinstatement is found to exceed the insured value.
One of the major areas for misunderstanding is a building’s market value versus its reinstatement value. Not the same thing at all.
The reinstatement value includes not just the cost of rebuilding the property but also demolition, debris removal costs, architect and surveyor’s fees, public authority and planning costs and don’t forget VAT, where applicable.
The same principle applies to business contents and machinery insurance. Most modern policies are on a reinstatement basis, providing a new replacement, rather than an indemnity settlement which provides a used/secondhand value.
A common error is where the “written down” values of current equipment are used from the company’s balance sheet. This is clearly not the same as replacing with new equipment. Another area that has caught businesses out, and will continue to do so, is currency fluctuations.
If you are buying some of your equipment or supplies from abroad, you only need to look at the fluctuations of the pound against the euro since the Referendum vote to see the implications.
Then there is the vexed question of business interruption. It is believed that as much as 40% of businesses are under-insured for business interruption.
It is not just a question of the accountants defining and agreeing with the insurance company the gross profit lost, the time taken for a business to return to the trading position they were at before the loss occurred is often under-estimated.
Factors such as debris removal, construction, planning issues, lead times on machinery and commissioning – and not forgetting the time taken to rebuild the customer base which will have gone elsewhere to source your products and services in the meantime – can all hit a company’s ability to stay in business.
It doesn’t matter if you are building is a Building of Architectural and Cultural significance or a corner shop in Redditch, the same principles apply.
It is always best to appoint a Chartered Surveyor to calculate the current rebuild cost and then ensure that you fully understand the cost of reinstatement of machinery by consulting with manufacturers regularly.
You should also review these values in the light of inflation and currency fluctuations where applicable.
And your business interruption cover also needs regular review.
Under insurance is a major issue in the UK, especially in the SME sector where shortage of management time often means this is overlooked.
However, when disaster strikes it is too late to take the above advice retrospectively.
If you have concerns about your business insurance, please call us for a free, confidential chat on 01527 584242.
Share this story