The levels of underinsurance in the commercial space is of real concern particularly for commercial property owners who are putting their investments at risk.
It is believed 80% of commercial properties are underinsured and the problem of inadequate insurance includes shops and restaurants, hotels, factories and storage facilities.
Some may believe the consequence of underinsurance is no big deal, but they usually have not been on the wrong end of submitting a claim for a building with an incorrect valuation. Firstly there does not need to be a total loss for ‘Average’ to be applied, i.e. where insurers pay only the percentage of the loss, equivalent to the ratio of the buildings insured value when compared to its correct valuation. If the underinsurance is so significant then some insurers have simply cancelled the policy from inception. Additionally with the current tighter lending conditions and increased borrowing costs, driven by the recession, it could be very difficult to get the funds to make up any shortfall in the amount paid out from insurers following a loss.
Any insurance valuation is made up of several component parts and often not all these parts get adequate consideration. To cover the full cost of reinstatement the valuation must also include the costs for removal of debris, architects and surveyors fees and VAT where appropriate.
It is sometimes the case that landlords do not charge VAT on rent so therefore need to include an element for VAT in the rebuilding costs. With rebuilding cost inflation running at 5-7% annually its cumulative effect within a few years can be significant. Then there is one of the basic errors when providing an insurance value; using the purchase price figure rather than the appropriate insurance reinstatement value.
For all good insurance brokers the last thing they want to face is having a policyholder with a genuine claim that is covered only to discover that the sum insured is not adequate. So they have a duty to remind landlords of the benefits of regular valuations, the consequences of underinsurance and more importantly how they can take the right actions in a cost effective and efficient manner.