Underinsurance: is your business at risk?
Insurance is a cornerstone of your business, designed to transfer risk and provide essential financial security. However, for this safeguard to work, your policy must accurately reflect the true value of your assets.
Underinsurance: what is it?
When you insure your property or livestock for less than their actual value, you create a dangerous gap known as underinsurance. This is a real and pervasive problem, and it is difficult to understand why the issue seems to have such a low profile when it poses such a threat to your business survival and its on-going success.
Research by the Chartered Institute of Loss Adjusters estimates underinsurance to be present on over 40% of claims.
For the agricultural sector in particular, where asset values can fluctuate and be complex to assess, this issue poses a constant threat to a farm’s ability to recover from a significant loss.
The core of the problem lies in a standard policy term known as the ‘condition of average’. In simple terms, if you’re underinsured, your insurer will proportionally reduce your claim settlement. This means you don’t just lose the difference between your declared value and the true value; you lose a percentage of your claim that is equal to your percentage of underinsurance. Consider this livestock example:
| Declared Livestock Value on Policy Schedule | Actual Livestock Value at Risk | Cost of Livestock Loss | Claim Settlement by Insurer | Financial Shortfall for Policyholder |
| £100,000 | £150,000 | £27,000 | £18,000 | £9,000 |
| Estimated by the Policyholder at inception of cover and declared as the livestock sum insured. | True value at risk, normally assessed at the time of a claim through completion of a value at risk form. | Policyholder suffers a significant loss of livestock due to an insured peril. | Underinsurance ‘Condition of average’ applies. The final settlement is proportionally reduced to ⅔ of the claim value. | Policyholder is left ⅓ of the claim amount short. |
The example above clearly demonstrates how underinsurance can leave you with a significant financial shortfall precisely when you need the most support.
With livestock prices currently buoyant, it is more critical than ever that your sum insured reflects the overall value at risk. Regular reviews of your policy are essential to ensure your coverage keeps pace with market values. Insurers have minimal margins on livestock claims and will almost always require a Statement of Value to assess your claim, making accurate and up-to-date figures crucially important.
Beyond Livestock: Insuring Your Farm Buildings
Underinsurance is not limited to livestock; it is a serious risk for your farm buildings as well. The current landscape of labour shortages, supply chain disruptions, and significant material inflation presents new challenges to accurately assessing the true rebuilding costs of your assets. These factors can lead to longer lead and repair times, adding to the financial strain following a loss.
A building’s market value is irrelevant for insurance purposes. Your sum insured must reflect the full cost of reinstatement, which is the total expense of rebuilding or repairing a structure to its pre-loss condition. This includes more than just the main structure; it must also account for essential elements like foundations, drains, professional fees for architects and surveyors, debris removal, and compliance with modern building regulations and planning requirements. Overlooking these factors is a frequent source of underinsurance.
The basis of your policy settlement is also a critical factor. The preferred outcome is Reinstatement, where the insurer agrees to rebuild or repair the property to a condition equivalent to its state before the loss. However, some policies may offer a ‘Modern Materials’ settlement. While this can seem attractive due to lower premiums, it can have some negative consequences. For example, if your building has a traditional stone, brick, and slate construction, the insurer may only agree to settle for the cost of rebuilding with cheaper, modern materials. This can cause a significant shortfall, especially if you are required to use traditional materials due to a building’s listed status or its location within a National Park or Conservation Area.
FUW Insurance Services Ltd: We’re here to help
Don’t let this hidden threat of underinsurance jeopardise the future of your business. FUW Insurance Services can help you review your insurance requirements. Contact your local Account Executive today to help make sure your policy provides the protection your business needs.
FUW Insurance Services is a trading style of FUW Insurance Services Ltd who are authorised and regulated by the Financial Conduct Authority, Firm Reference Number (FRN) 615251. Registered firm and address : FUW Insurance Services Limited, Llys Amaeth, Plas Gogerddan, Penrhyncoch, Aberystwyth, Dyfed, SY23 3BT. Registered in England & Wales 07981993.