Expert view: How much should a business be insured for?

Underinsurance is a big issue, particularly for small businesses. If there’s a major loss (e.g. flood, fire or theft), and it’s found that the ‘sums insured’ amounts fall short of what’s really needed, then the business can end up in a very challenging situation.

1. Ignore the ‘market value’ of a building

The amount that a property is ‘worth’ if it were sold won’t be the same as how much it would cost to rebuild it. Similarly, when it comes to re-purchasing stock and equipment, replacements may have a heftier price tag than expected – plus, there could be installation costs to factor in. Ask your insurance broker about your insurer’s preferred supplier for valuation services, and take advantage of the Royal Institute of Chartered Surveyors’ Building Cost Information Service.

2. Make sure you haven’t missed anything

Certain items can slip through the net when calculating sums insured. Have you thought about the flooring, bathroom installations and white goods? Is there property currently being held elsewhere that might return during the policy term? Could there be more stock on-site at certain times of the year? Additionally, the presence of some of those items (e.g. fireworks) may be excluded so need to be explicitly mentioned during the quotation process.

3. Revisit policy limits whenever changes are coming

When new equipment is purchased, even if it’s replacing older models that are being removed, it’s important the relevant insurance policy is checked to make sure the cover is still appropriate for the increased value of contents. If the task is put off, it might not be until a claim needs to be made that it’s revealed the payout won’t match up to the required amount.

4. Work out the cost of keeping things ticking over

Besides the costs of sorting out the consequences of an event that means the business premises are inaccessible or essential equipment is unavailable, action will need to be taken to limit how much the event interrupts the business. It might be necessary to rent temporary premises and hire equipment so that customers’ orders can be fulfilled while construction work is being done, but this can get very costly while there’s already a lot being spent on re-purchasing and rebuilding and repair work.

5. Don’t underestimate the time it can take to fully recover

One of the most significant errors that can be made is to misjudge how long it will take to return to ‘business as usual’ following a major loss. Incident investigations, site clearance, obtaining appropriate planning consents and getting safety inspections completed will use up a lot of time; Then there can be delays getting materials, equipment and contractors onto the site, and then during the construction work problems can arise and stall progress.

This is not an exhaustive list and shouldn’t be seen as advice; It is a suggestion of the type of things that you may need to consider, as a business owner, to ensure that you are able to trade through an unfortunate large loss. Speak to your insurance broker for further guidance on preventing underinsurance, and consequential business interruption, in your individual and particular situation.