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Underinsurance – a front line perspective

At a glance

  • Loss adjusters frequently see underinsurance and the negative impact it has on claims
  • According to research by QuestGates, just an estimated 6% have the correct sums insured
  • We speak with a loss adjuster to understand some of the causes and solutions to the underinsurance problem

Zurich Insider interviewed Ross Macpherson, Director of QuestGates, one of Zurich’s partner loss adjusters, to better understand the underinsurance problem, and what we can do to tackle it more effectively.

Q. Research suggests that up to 80% of the UK’s commercial properties are underinsured – what is your experience of the extent of the problem?

Ross: I would definitely agree with that statistic, and our own research suggests the situation may even be slightly worse. In 2008, our annual survey found that 85% of customers were underinsured across all classes of business; in our latest survey this had increased to 89%, with only 6% of customers having the correct sums insured.

Q. Why should we be concerned about underinsurance?

Ross: Because of its impact on customers if they suffer a loss. Claims settlements may be proportionally reduced, customers will not be fully compensated, and as a result, businesses may struggle to recover.

Significant levels of underinsurance can sometimes raise questions around non-disclosure and/or misrepresentation. This could give an insurer grounds to avoid a claim, or even the policy.

Ensuring sums are accurate will mean claims run more smoothly and achieve the best outcomes for customers.

Q. Why are we seeing such high levels of underinsurance?

Annual survey of valuations conducted by QuestGates

Underinsurance Dangers

Ross: Many customers do not fully understand the term ‘sum insured’ and what information is required of them. Each type of sum insured – whether it is a building, machinery or stock – requires a different approach to valuation, but often customers simply give the purchase price, which may be out of date, based on a second hand value, or completely inappropriate to the basis of the insurance valuation.

We have also noted a lack of regular valuations occurring to account for potential changes in sums insured over time; not just changes to the asset value, but also changes in the marketplace and regulatory landscape.

Buildings, in particular, require regular valuations, as there are a number of factors that could potentially cause underinsurance. For example, improvements could have been made, a tenant might have added some fixtures and fittings (which become part of the building and thus the landlord’s responsibility to insure), new planning regulations might have been introduced, for example, the need to enhance insulation levels or improved access for disabled people – the list goes on.

All of these factors, and many more, can affect the reinstatement cost. If a claim arises, and the sum insured has not incorporated such changes, then underinsurance could be found, and any settlement could be reduced proportionally.

Q. In what other areas do you regularly witness underinsurance?

Ross: Indemnity periods, in business interruption covers are a problem area. Customers regularly choose a 12-month maximum indemnity period, believing this to be adequate, but in reality, it is not. For example, there could be planning issues, or difficulties in procuring machinery and plant, all of which means a business may not recover as quickly as anticipated.

24 months after the Tottenham riots in 2011, many businesses had not even begun repairs, let alone started trading again. We need to work with customers to ensure they are considering all eventualities and ensure indemnity periods are set accordingly. I think there is now a general call in the industry for indemnity periods to be a minimum of 24 months.

Q. What actions can we take to avoid underinsurance?

Case Study

  • A small industrial estate with a day one declared value of £11.9 million across all units
  • Broker wins business and accepts historical sums insured
  • Fire completely destroys two units on the estate, costing £2.78 million to demolish and rebuild
  • Valuation shows that the value at risk is in fact £15 million
  • Claim is reduced proportionally due to underinsurance, costing the insured circa £575,000

Ross: Firstly, I would recommend not taking declarations at face value. If a customer provides figures, it is important to double-check how they came to those figures, or assist them in their calculations.

For example, a lot of misunderstanding exists over the term ‘insurable gross profit’, which differs from how an accountant defines ‘gross profit’. Customers frequently provide the wrong gross profit figures, which can often leave them underinsured. This is a common issue with manufacturing businesses particularly.

We should also be strongly encouraging regular revaluations. Customers may think this means conducting a full survey annually, but this is not always the case. If a full valuation has been conducted previously – and is deemed to be accurate – then, providing nothing significant has changed, a desktop reappraisal may be appropriate, which is significantly cheaper.


To learn more about how we can help you to avoid underinsurance, please speak to your local Zurich contact.

Find out more and access helpful guides and insight with our new UnderinsuranceFire and Flood Risk Resources.

Image © Getty

Leave a comment

Neil Sidney

February 6th, 2018 at 11:18am

Question 3 - correct answer is 6% but the assessment says all three options are incorrect.

Donna Conway

March 15th, 2018 at 9:45am

i have answered all three questions but it states question 3 has been answered incorrectly, I have even tried all three answers but it keeps staing incorrect. Please could you look into this.Thank you