At a glance
- Underinsurance is widespread, with up to 80% of the UK’s commercial properties thought to be underinsured
- Inadequate cover presents a great risk to customers and brokers
- Zurich Insider has summarised the key issues facing brokers to help them combat underinsurance from research conducted by Insurance Times
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Underinsurance is a persistent problem for the insurance sector. It is thought that up to 80% of the UK’s commercial properties are underinsured and 40% of businesses underinsure their business interruption cover.
Keeping on top of customers’ sums insured can help brokers avoid those difficult conversations when a claim occurs, and minimise the risk of potential litigation from underinsured and aggrieved customers.
Understanding the key points of this issue can greatly assist brokers to ensure customers maintain adequate levels of cover.
1. Main causes of underinsurance
The majority (63%) of brokers cite ‘failure to carry out regular valuations/assessments’ as the main cause of underinsurance, according to research by the Insurance Times.
Setting sums insured and indemnity periods requires consideration of a number of different factors, and there is no substitute for professional valuations and advice. But the value of insured items and circumstances of a business will not remain static; it is important that repeat assessments are regularly carried out to ensure sums insured and indemnity periods remain adequate.
For example, the cost to reinstate a building can change significantly from year to year. Material and labour costs are in constant flux, legislation can require additional design considerations, and planning authorities can dictate alterations to the building and its site. A failure to update sums insured to account for such changes can result in a significant financial shortfall in the event of a claim.
Many brokers and insurers now have close links with professional valuation companies. Most will charge a small fee to use this service, but it will often be cheaper than on the open market, and can offer an easy and cost-effective means for customers to limit their risk of underinsurance.
Lines of business most likely to suffer
2. Lines of business most likely to suffer
Property is most susceptible to underinsurance, with business interruption similarly problematic. Brokers and customers need to be aware of the interconnectivity between different classes of business, and the knock-on effect of any of these being underinsured.
For example, if a building is underinsured then a policyholder will need to source additional funds to account for the shortfall in claim settlement. This can delay reinstatement and prevent a business returning to pre-loss activity levels. The indemnity period on the customer’s business interruption policy may be adequate under ideal circumstances, but an unforeseen delay could cause the indemnity period to be exhausted, and claims payments to cease, greatly hindering the business’s ability to recover.
In the absence of regular reviews and valuations, it is easy for underinsurance to become present in a customer’s insurance arrangements. Brokers should inform customers of the wider impact of underinsurance, beyond the simple reduction of claims settlements, to encourage informed decisions when setting sums insured.
3. Customers’ focus on price
More than a quarter (27%) of brokers questioned believe that ‘too much focus on price’ is the main cause of underinsurance. Many customers fail to see underinsurance as a major risk and may inadequately insure items to maintain lower premium levels.
Customers should be prompted to reflect on their reason for purchasing insurance. If the reason is to compensate them adequately in the event of a loss, then the sums insured must be correct or the product will not achieve the desired outcome.
The consequences of underinsurance need to be made abundantly clear by brokers to customers to ensure they fully understand the risk.
4. Risk of litigation
The judge in this High Court decision set out how brokers should approach business interruption advice:
- A broker is not expected to calculate the sum insured or determine the indemnity period themselves
- The customer must be provided with an adequate explanation of how to calculate an appropriate sum insured and indemnity period. This will likely require an explanation of the formula stipulated in the policy wording
- Reasonable steps must be taken to ensure the customer fully understands the meaning of “insurable gross profit”
- Reasonable steps must be taken to ascertain the nature of the customer’s business and its insurance needs. The broker’s obligations to assess its customer’s needs will depend on the customer’s sophistication
- Advice does not necessarily have to be repeated annually if given previously, understood by the customer and documented (assuming the contact at the customer remains the same)
- If a customer who appears to be well informed provides a broker with information, the broker is not expected to verify it unless there is reason to believe it isn’t accurate
- Having satisfied these obligations, if given express instructions, the broker must exercise reasonable care to adhere to those instructions
Brokers face a very real risk of litigation if customers are inadequately covered due to underinsurance. Underinsured policyholders may seek to claim the shortfall from their broker, alleging negligent advice on setting their sums insured. A large proportion (44%) of brokers surveyed by the Insurance Times said they were concerned about being sued by an underinsured client, although fortunately the majority felt they had all the documentation required if they were placed in a position where they needed to defend a claim. Nonetheless it is a clear concern.
Whilst not expected to calculate the figures on their customers’ behalf, brokers have a legal duty to explain to customers how to correctly set sums insured and take steps to ensure they fully understand policy terms.
5. An opportunity for brokers
The continued prevalence of underinsurance presents a real opportunity for brokers to grow their business. With sums insured consistently lagging behind valuations by at least 20%, efforts to ensure customers are correctly insured can pay dividends through increased premiums and brokerage, and importantly better outcomes for their customers in the event of a claim.
The rise of non-advised insurance sales, particularly through online platforms, greatly increases the risk of customers being underinsured. By educating customers on the dangers of underinsurance, and advising on how to avoid it, brokers can demonstrate the added-value proposition they offer over non-advised sales.
Brokers are on the front line in the fight against underinsurance and have every incentive – from both a commercial and liability perspective – to ensure their customers get their sums right.
For more information please speak to your local Zurich contact.