The Rural View – Underinsurance

What you need to know about underinsurance

Given the economic pressures people face, underinsurance can be a result of individuals or businesses cutting corners to save on their premium. However, in doing so it can have significant financial implications on your business when things go wrong.

What is underinsurance?

The Association of British Insurers defines Underinsurance as:

“when your insurance cover, or sum insured, is less than the value at risk”

Underinsurance can occur across all aspects of Farm and Farm motor policies – from your buildings, your machinery to your home and its contents.

Rural’s Claims manager Mark Jones says it’s common for individuals to under estimate the value of their items, valuing them lower than what they’re worth. Occasionally it can be done deliberately to reduce premium costs …..but this can be a false economy.

“As insurers we want the sums insured to be correct so that in the event of a claim the insured receives the full payment allowing them to replace what they’ve lost. That’s why it’s important to remember to calculate your sums insured on the rebuilding or replacement cost when valuing your assets”.

In the event of a claim we want to support our customers by resolving claims quickly and efficiently, enabling them to keep their business moving whatever happens. However, to do so customers need to ensure their policy reflects their business’s needs.

Common causes of underinsurance

Unfortunately, many often learn the impact of underinsurance when it’s too late. So, to help understand the causes of underinsurance we’ve listed a few examples below:

  • Your assets including buildings and machinery haven’t been professionally valued recently. Ideally you should get them valued on an annual basis.
  • Failing to update your broker on changes/alterations to your business e.g.
    • You’ve extended or altered a building
    • You’ve bought new machinery
    • You have more livestock on your holding now than when you originally took out your insurance policy which may have been a number of years ago.
  • You’ve underestimated the value of your contents. Just think how much it would cost you to replace your household items such as smart phones, laptops and TV’s…..the cost soon adds up.
  • You haven’t factored in professional fees such as an architects or surveyors, when having to rebuild a barn.

What’s the impact of being underinsured?

It’s easy to explain the importance on having the correct cover but examples illustrate the true impact. One of our customers had insured their 4-bed property at £265,000 (based on cost of materials only). The property suffered severe damage. The actual rebuild cost was calculated to be over £900,000, resulting in a significant element of underinsurance. This was an extreme case but, it emphasises the need to make sure your sums insured is correct.

Reducing the risk

The risk of underinsurance can be significantly reduced if you have the correct conversations each year. It’s important you have the right level of cover so make sure you keep your broker informed about any changes to your farming business that could impact your insurance policy. If you’re concerned that you might be underinsured check your policy details or contact your insurance broker.

Produced by Rural Insurance