Understanding and Preventing Under-Insurance
Under-insurance occurs when a policyholder’s insurance coverage is insufficient to meet their needs. This can result in a claim amount that exceeds the maximum payout the insurance company will cover. Consequently, the policyholder may face a shortfall, leading to significant financial losses for the organisation. To avoid this, it’s crucial to take proactive measures. Here are six effective ways to prevent under-insurance:
Regularly Value Business Assets Accurately
It’s essential to frequently assess the value of your business assets to ensure your insurance coverage remains adequate. While businesses can perform these valuations themselves, hiring a professional can provide a more precise assessment.
Provide the Correct Rebuilding Cost
When insuring your property, always provide the insurer with the cost of rebuilding it, not its market value or the original purchase price. The rebuilding cost ensures your coverage reflects the actual expense of restoring your property in case of damage.
Calculate and Report Actual Total Revenue
To ensure adequate coverage, calculate your actual total revenue and report this figure to your insurance company. Accurate revenue reporting helps the insurer assess potential risks associated with your operation and provide appropriate coverage.
Determine an Appropriate Indemnity Period
Select an indemnity period that allows your business sufficient time to recover from any incurred loss. An appropriate indemnity period ensures you have enough time to restore operations without financial strain.
Increase Sums Insured in Line with Inflation
Regularly adjust your sums insured to keep pace with inflation. This practice ensures that your coverage remains sufficient to meet rising costs over time.
Review and Update Your Policy Wording
Periodically review your policy wording to ensure it offers the broadest cover for your needs. Update the policy whenever there are significant changes in your business to maintain comprehensive protection.
By taking these steps, businesses can significantly reduce the risk of under-insurance and ensure they are adequately protected against potential financial losses. Regular evaluations, accurate reporting, and proactive adjustments to insurance policies are key to maintaining sufficient coverage and safeguarding your business’s financial stability.
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