What Are the Risks of Underinsurance?
By Shani Barclay, Commercial Account Executive
Underinsurance occurs when something is insured for less than its actual value, resulting in insufficent insurance coverage. Discovering you're business is underinsured could happen at the worst possible time.
I was recently contacted by a solicitor who wanted some advice about a motor mechanic client. His clients’ workshop had suffered a devastating fire which had spread from an adjoining workshop. A joiner in the same development had been burning waste wood.
For some reason, this fire was left unattended and a much larger fire took hold. Sadly, it destroyed everything, including several vehicles belonging to various customers.
A loss adjuster was appointed who soon discovered the business to be underinsured across all the cover sections. Unfortunately, they had no cover at all for Business Interruption or Tenants Improvements. The clients’ broker had been in contact every year to check the sums insured were adequate and to be informed of any changes. No changes were ever submitted by the client, and this situation carried on for years.
As an insurance broker to clients in the motor trade sector, I understand how quickly new equipment gets added to a business. As the business becomes more established and gets busier, the value of customer's cars on the premises will also increase. But this clients’ sums insured had not increased and consequently, his premium had also remained pretty static.
The broker had been diligent and asked the questions required to meet compliance standards. It seems the client, by his own admission, didn’t look at the cover, he looked at the premium and then put the documents in a drawer.
Several months after the fire, the client received an offer of settlement. But it didn't come close to meeting his losses and he was unable to resume trading again.
So, what recourse did the client have? Could he sue the broker? This would be costly and probably prove the broker had asked all the right questions. It was the clients’ duty to check the cover was correct and met his needs. Where there is underinsurance, the condition of average will be applied, and the claim will be reduced proportionately by the amount of underinsurance.
Could he sue the joiner who had left waste burning? Yes, but what means the joiner will have to pay compensation is questionable. His insurers won’t pay out either, as he had a burning of waste condition which prohibits such activity.
To top it off, sadly he doesn’t have the expenses available to fund legal action.
At Bruce Stevenson, we're always happy to discuss your existing insurance to make sure your business doesn’t find itself underinsured. Learn more about the services and products we offer to ensure you have adequate cover.