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Major loss events reveal underinsurance dangers

At a glance

  • A major loss, such as fire or flood, can strike unexpectedly
  • The discovery of underinsurance following a major loss could not come at a worse time
  • Our whitepaper highlights common areas of underinsurance and how to avoid them

This article counts towards accumulating your annual CII CPD structured learning hours for Underinsurance.

By reading this article, and correctly answering the three questions underneath, you will have achieved the following learning outcome: Identify the most common causes of underinsurance.

Visit the CPD Hub to log in and begin accumulating CPD hours.

Underinsurance is often discovered following major loss events, such as fires and floods. When faced with a potentially long and difficult recovery, the impact of underinsurance could not come at a worse possible time.

It is therefore essential to ensure that you’re correctly approaching the task of setting sums insured, and that you continually review any figures to account for changes and avoid the perils of underinsurance.

Underinsurance left specialist manufacturer in ashes

After a fire at a manufacturing plant, the initial cost of the claim by the manufacturer was estimated to be over £25m with the possibility of further increases.

During the investigation by Zurich, it was revealed that previous inspections by a different insurer had failed to highlight certain risks, including underestimation of mitigation costs, lack of insurance to cover future losses within the indemnity period and specialist machinery replacement issues.

As such, the loss estimate was outside the expected estimated maximum loss. All of this led to a business interruption loss of over £14m.

Underinsurance occurs when a business and its assets are insured at less than their true value. This can result in claims settlements being reduced and customers needing to source additional funds in order to fully recover.

Regular professional valuations are always recommended, as valuing assets for insurance purposes can present a number of potential pitfalls – for example, requiring varying approaches for assets insured on either a reinstatement or indemnity basis.

And, it is not just tangible assets that are susceptible to the perils of underinsurance – according to the Chartered Institute of Loss Adjusters, as many as 40% of business interruption policies are underinsured, with the average shortfall running to 45%. This can arise for a number of easily avoidable reasons,  such as misunderstandings over the term ‘gross profit’ for insurance purposes or choosing an inadequate indemnity period.

Underinsurance is a perennial problem and it is difficult to understand why the issue seems to have such a low profile at executive board level when it poses such a threat to business survival and on-going success following a major loss

Adrian McGuire, Zurich’s Head of Commercial Broker Property

Although major loss incidents are thankfully rare, when they do occur the damage inflicted upon businesses can be grave. The discovery of underinsurance at this time can add significant additional hardship, yet is entirely avoidable if proper care is taken.

“Underinsurance is a perennial problem and it is difficult to understand why the issue seems to have such a low profile at executive board level when it poses such a threat to business survival and on-going success following a major loss,” said Adrian McGuire, Zurich’s Head of Commercial Broker Property.

Avoiding underinsurance all comes down to knowing your business inside and out. To help in this task, our latest whitepaper – A comprehensive guide to avoiding underinsurance – details the most common areas where underinsurance is found, alongside the reasons it arises and what steps you can take to avoid it.

We are very happy answer any questions and offer assistance on setting sums insured across all types of insurance policies.

For more information on how to avoid underinsurance, please speak with your local Zurich contact.

You can also find out more and access helpful guides and insight with our new UnderinsuranceFire and Flood Risk Resources.

Image © Getty

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