Person stood in flood water looking an the damage around them

Underinsurance: A threat to UK businesses

18 June 2019
Underinsurance is a huge threat to the sustainability of UK businesses. This usually applies when a business has an insurance policy, but certain elements of cover may not fully meet their needs, should they suffer a loss.
There are many situations where this might occur. One of the most common is when a business gives  the market value of their property rather than the rebuild cost to their insurance broker. If the building is then destroyed in a fire or other devastating event the rebuild cost of the property could exceed the market value of the property, leaving the property owner to bridge the gap left between the market value and rebuild costs.
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Underinsurance statistics


  • An estimated 40% of UK businesses are underinsured.
  • A quarter of UK SMEs said that they would close if they had an unexpected bill of £50,000.
  • 80% of the UKs commercial properties are thought to be underinsured.

Reasons businesses are underinsured

Businesses can find themselves underinsured for a number of reasons, whether this is by accident or on purpose.

Some business owners miscalculate the amount of cover required to protect their business assets which is when average will usually apply within an insurance policy. For example, if you request cover for a laptop at £500 but the actual cost to replace it is £1,000 there is a £500 shortfall. As you have only paid a premium based on £500 this is the most that the insurer will usually pay out following a total loss and you will have to find the rest to make up the shortfall. Any partial loss will be reduced by the same proportion of the cost to replace the item and the amount set to cover; this is known as Average.

Some companies may be underinsured if they aren’t aware of some specialist covers. An example of this could be cyber insurance, which rarely comes as standard for an insurance policy, but more and more businesses are now experiencing cyber-attacks, which might not be covered by their insurance policy.

Some business owners believe that by providing lower sums insured or removing elements of cover it will help keep premiums down. However, there is a danger that by doing this the items believed to be covered will either be underinsured or not insured at all and at the time of need, when making a claim, they are subsequently left out of pocket.

Many retail businesses, during peak trading seasons, can have increased levels of stock when preparing for a seasonal event which can make or break the entire trading year. Most package shop insurance policies will include a seasonal stock increase clause which provides an specific uplifted percentage to the stock sum insured to ensure your policy will cover this increase during those busy periods and give you, the business owner, peace of mind the specified increase is covered during your busiest periods. For example, if a gift shop experienced a major loss in December during the run up to Christmas the loss would likely be higher than it would during a normal trading month as there is more stock at the premises. This additional cover is only applicable during the period specified in the clause so it is still important to get the sums insured correct to ensure you are not left out of pocket should you need to make a claim.

The dangers of being underinsured

Being underinsured can be dangerous to your business for many reasons.

One of the main dangers of being underinsured is that your business may suffer a significant financial loss. Let's take the earlier example of underinsuring the laptop and apply the same logic to a property owner. The property owner asks to insure the building based on the market value of the property rather than the rebuild cost with the market value being £150,000 but the rebuild being £300,000. Subsequently, the shortfall following a total loss would be £150,000 which would leave the property owner with a substantial amount of money to find to pay out of their own pocket when rebuilding the property.

An insurance cover that some people may deem unnecessary is business interruption; however this cover can protect your income for a period of time if you are unable to trade following an insured event. An interruption to your business may leave you unable to fulfil your contractual obligations to your customers, which in turn could damage your reputation. You may also struggle to begin trading again without the protection of your income during the period of interruption.  Business interruption cover can give you the peace of mind that your income is protected during the interruption and can continue to do so until you are back trading to the position you were at prior to the loss.

Cyber insurance can also be overlooked with business owners, but research shows that 41% of business owners said that they didn’t think cyber-crime affects them. Statistics have shown that the average cyber-attack will cost £16,100 for a medium sized company, per breach, and will take a full 24 hours to recover from, leading to loss of revenue and potentially damage to your reputation.

98% of UK companies use some form of digital communication or technology, and cyber-crime is set to have a global cost of £4.5 trillion by 2021. Because of this, cyber insurance will become increasingly more necessary in the near future.

If you suffer a business interruption or cyber-attack, where you may not be able to cover the costs yourself, you may be left with no other option but to close down your business if you do not have the correct insurances in place.

Making sure that you have the right insurance in place could potentially save your business. Make sure that you have the most comprehensive cover by doing the following:

  • Research all of the various insurance covers, even the ones you might not think you need.
  • Talk to one of our insurance advisors who can assess your business insurance needs
  • Provide your revenue, property and other valuations as accurately as possible to make sure that you can be properly compensated in the event of a claim
  • With your property insurance, give the cost of rebuilding your property rather than the market value. If your property is destroyed, the cost of rebuilding could be significantly higher than the market value. You will need to think about what makes up the cost of rebuilding, not just the materials and labour, but also the other costs involved. Costs in relation to compliance with your local bye-laws and stipulations, public authority regulations, architect or surveyors fees and debris removal are costs that you may not have previously thought about.

As a business insurance broker, Premierline will assess your insurance needs and offer advice that suits your company, making sure that the insurance you need is perfect for your business.

We know that all businesses are different, and as such have different insurance needs, so why not speak to one of our trained insurance experts who will find you a competitive no obligation quote from some of the UK's most well-known insurers.

It is important to make sure that you have the right insurance in place to protect the business that you have built. Every business is different and has its own business insurance needs, which is why we work with some of the UK’s most well-known insurers to ensure that you are getting the right insurance cover for your business.
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