In many policies of insurance if you under insure you are penalised when it comes to a claim. Even in partial losses you may be deemed to be carrying some of the risk yourself and the Insurer will ask you to bear a portion of the claim yourself.
Nonetheless, a policyholder may still run out of sum insured in the event of a major loss.The penalty for under insurance, even with partial losses is the application of average. That means there is absolutely no tolerance for getting it wrong. If you are under-insured by 5% you only be paid 95% of your loss.
Please review what is covered under the policy you wish to offer your client. Some explanation is provided with our business interruption calculators. It must be remembered that if there is a very significant level of under-insurance then insurers have the right to avoid the claim completely and cancel the policy “Ab Initio”. This situation may be avoided if the cover is on an Estimated Gross Profit basis. Business Interruption policies have one of the worst if not the very highest incidence of under insurance of all the classes of general insurance. It is estimated that over 70% of policies have some form of under insurance.
To show the impact of under insurance we include the following example.
If the insurance policy was for £500,000 and the value at risk was say £1,000,000 with a loss of £200,000 the claim would be adjusted as follows.
Under insuring the Insurable Gross Profit is just one form of under insurance. Others are not having a sufficient Indemnity Period, see How Long Should I Insure For, wages cover, claims preparation fees or Additional Increased Cost of Working cover. In summary then, Business Interruption Insurance is not a first loss cover. If you under declare your sum insured (sometimes called Declared Values) then you are deemed to be your own insurer for the proportion of any loss no matter how small or large. In reality the cost of BI insurance is not high, particularly when you consider the level of protection it can bring in the event of even a short disruption. The cost is tax deductible and unless your business has significant cash resources or you have the ability and are prepared to fund the recovery program yourself it is a product that is strongly recommended.