Jamie Truscott takes a look at the case of The Clockhouse Inn and reveals how underestimating the impact of underinsurance can cause huge disruption to businesses

If you’re a business owner it’s natural to train your focus on the tasks that you think matter most, those so-called business critical activities. And, it’s very easy to miss those considerations that we think are of lesser relevance, such as regular insurance surveys. But that’s what we’re going to discuss today.

There are large risks associated with underinsured properties, and if you haven’t had a property valuation in recent years and your property gets damaged, it could be very much business critical.

In this article I explore what underinsurance means, take a look at a recent case study and provide an understanding of what the proper valuation is (from now on we’ll call it by its proper name, a reinstatement cost assessment) and how it can help.

What if the worst were to happen?

A fire breaks out one evening in your building, the fire service arrive promptly and try to minimise the damage, but by the time you arrive you are looking at nothing but a water-damaged shell. It’s an awful thought, and not something you’d want to consider, but what happens next?

Would your employees turn up for work in the morning? What would they do? You are dealing with the emergency services and the insurance company, and already a couple of hours in you are losing money, your staff won’t be able to work, your customers calls go unanswered, your stock is damaged and all your data and IT equipment is broken. There are so many considerations.

You dig out your disaster recovery plan, roles are assigned and actions are taken.

As part of a major loss, you will be appointed a loss adjustor by the insurance company to determine whether the claim should be met, and if so what the settlement should be. Typically the loss adjustor will attend the site soon after the claim, and it will be their roll to investigate:

• The circumstances of the claim
• The extent of the loss
• The policy and cover

They will report to the insurance company and aim to advise the insurers of the potential claim cost allowing insurers to set aside money accordingly.

For simplicity, the loss adjustor has recommended that your claim be settled. You will be paid the full valuation amount in relation to the building. This all sounds great and you can move forward with clearing the site and scheduling works.

But what happens if your building is underinsured?

Maybe you didn’t have an insurance valuation carried out recently, or you used the property sale or market value rather than the reinstatement valuation. This could be disastrous, and could result in the insurance payment being less than the cost to rebuild your property.

Consider this, if your property were substantially underinsured and your insurance company are only going to offer you a fraction of the cost of reinstating your property, just how would you make up the difference? Do you have the financial resources to do so?

During all of this uncertainty with the ongoing needs to your business, your staff and your customers, you now need to ascertain if you will be able to find the funds to make up the shortfall.

The Clockhouse Inn

Back in April 2015 a fire broke out at The Clockhouse Inn in Chideock, Dorset. The building was destroyed and nothing was salvaged from the property. Sadly, The Clockhouse Inn was both the home and business for its owner, Mr Long.

After the fire the building was valued for £1.3m, but the insurance valuation in place for the building was less than 40% of this at just £554,869. This meant that the sum offered from the insurers was £210,000 (40% of the original valuation) with a shortfall of £311,000 against the sum needed to rebuild.

The owner, Mr Long subsequently had an additional survey carried out and is now receiving a sum of 57% of the sum insured, but there is still a large sum that needs to be made up at such a devastating time (source: Bridport News).

This is just one of many cases that we have seen. Following the example at The Clockhouse Inn, 17 properties in the small village of Chideock were revalued, all of which were found to be underinsured.

Reasons for underinsurance

Underinsurance can happen for a number of reasons. Here are some of the most common:

• Failure to carry out regular valuations
• Using the commercial sales or market value of the property
• Items not included such as debris removal, professional fees or VAT

Reports suggest 60% of the properties that we carry out an insurance valuation for, are underinsured by up to 80% (Read our guide, Underinsurance – The Issues for underinsurance stats)

A leading figure in the loss adjusting profession, David Croston recently explained to me what happens at claims stage regarding sums insured:

“When a claim occurs, the adjuster will carry out what is called a value at risk review. If that reveals that the buildings sum insured is inadequate, the Policyholder will not have paid sufficient premium and in turn that means the Average Condition will apply i.e. any settlement will be reduced in proportion to the underinsurance. By way of example, if you are 50% underinsured, the claims settlement will be reduced by 50%, which most people would agree is an equitable or fair outcome.”

Being underinsured can end up being very costly in the event of a serious claim, so the advice is – don’t take a chance – have a reinstatement cost assessment undertaken for peace of mind.

When a building is not insured to the correct value, reinstatement can be delayed and it can prevent a business returning to pre-loss levels of activity.

What should an insurance valuation cover to protect against underinsurance?

A reinstatement cost assessment of the building would normally include:

• The main structure including foundations
• Half of the cost of party walls and protecting adjoining structures
• Landlord’s fixtures and fittings
• The peripheral features that form part of the site
• The cost of demolition of the above
• The cost of debris removal
• The cost of professional fees

VAT is a further consideration in relation to debris removal, professional fees and building costs.

If disaster strikes the effects of underinsurance can be devastating, so my advice is, always make sure you are protected against this risk with regular insurance valuations carried out by trusted experts.

This article appears in our magazine, Cardinus Connect. Download it for free here.

If you are unsure about the real cost of your property, or if you need to get a valuation on your property, check out our building insurance valuation service.