Is your commercial property underinsured?
Anyone that operates their business from a commercial property will be well aware of its significance to the success of the business, whether this is as a manufacturing facility, a retail premises, a surgery for seeing patients, or a warehouse for storing goods. However it is used to support the business operation, making sure the right level of insurance cover is in place should be a top priority. If the building suffers a disaster, such as a fire or flood, you will need to rely on that insurance to cover the costs of a rebuild or repair.
This can only happen if the building sum insured has been set at the right level. With recent increases in building materials and labour costs and other external factors, companies may find that their building sum insured might not now be enough.
At Barnes Commercial we are passionate about supporting businesses with honest insurance and risk management advice, so when we hear about emerging challenges for commercial property owners, we want to share them.
The risk of underinsurance for many commercial property owners is growing. If you are the owner of a commercial property and haven’t reviewed the building sum insured for some time, you might discover that your building may be underinsured. This could leave you in a precarious situation if disaster strikes and is the reason why we’re encouraging all commercial property owners to review their reinstatement cost assessment.
What is a reinstatement cost assessment?
This is an assessment to determine how much it would cost to rebuild your property if it was destroyed or damaged by an unexpected event such as a fire or flood (i.e., a total loss claim). You might be more familiar with the term ‘Building Insurance Valuation’.
In the UK, three quarters of all commercial properties are underinsured according to research carried out by Towergate (November 2020). This is an alarming statistic and makes you wonder why. There are a variety of reasons that this situation has arisen, which we will help to explain – in most cases this will not be intentional.
Why you might be underinsured
One simple reason for underinsurance is that the cost to repair or rebuild a property has increased. Building materials and labour costs have risen over the last few years, as a result of Brexit and more recently the COVID19 pandemic. The supply of materials has been negatively affected as new trading regulations and logistical restrictions have come into play.
According to the Department of Business, Energy and Industrial Strategy (BEIS) building materials costs have soared by 23% this August compared to the same time last year.
Shortages of key construction materials such as steel, cement and timber are being experienced, with latest construction and infrastructure survey from The Royal Institute of Chartered Surveyors (RICS) stating that 82% of respondents reported material shortages, limiting activity in the second quarter of 2021. This is up from 57% in the first three months.
In addition to this there is also a shortfall of builders themselves, something predicted as unlikely to change for the next four to five years. In fact, the ONS reported that between May to July this year there were 38,000 vacancies in the construction industry. It’s basic economics that when demand is high and supply is limited, costs increase.
There are other costs to consider over and above those of the builder and materials. You may need to engage an architect, pay for site clearance, a demolition company, or even pay fees to the local council.
If you rely on your commercial building for the success and longevity of your business, you need to be able to rely on your insurance in the event of a total loss. If you experience a fire or flood, you need to rebuild or repair your commercial property as quickly as possible, to enable a fast recovery and recoup losses effectively. Of course, if you have robust disaster recovery plans in place, the speed at which you can get back to normal operating practices should be improved.
What happens if you’re underinsured?
If your building is underinsured, the cost to repair or rebuild will not be entirely met by your insurance. This means you will need to meet the shortfall personally, or by other means. You should consider if you would you be able to meet these financial requirements.
Additionally, if you are found to be underinsured, your insurance company will apply a condition known as ‘average’ to your pay out. This means that they will reduce the claim settlement amount proportionately to the amount of your underinsurance. If you have a large property or your underinsurance is significant, this could be a substantial amount and may result in your inability to rebuild or repair your building.
You need to consider if you would you be able to continue to run your business without your building.
We highly recommend a reinstatement review to make sure that your sums insured are at the right level. If you have not looked at the cost to rebuild your property for a few years, it would be prudent to do so now. Naturally, if the rebuild valuation increases, your insurance costs are likely to rise too, but there are other reasons why you might experience a rise in your insurance premiums.
Other reasons for premium increases
Climate change has certainly played a part as the reason for some instances of increased premiums. We are experiencing adverse weather more often and seeing an increase in the scope and frequency of claims resulting from subsequent storm damage.
With natural catastrophe claims on the rise, insurers require a bigger pool of funds to draw from in order to settle these claims, which has inevitably resulted in higher premiums.
What can you do to make sure you have the right cover at the right premium?
With insurers and underwriters requiring more and more information from you as a commercial property owner, it would be wise to make sure you have up to date information ready to provide. This information should include details about property construction, your operations, how you protect your business and your risk exposure.
For your commercial property specifically, it would be helpful to invest in regular property maintenance and upkeep, to be able to demonstrate your commitment to the building; that it’s in a suitable condition for you to carry out the business function safely from it. We strongly recommend that you carry out a reinstatement review, so that you have the right level of cover in place and do not leave yourself exposed to risk from underinsurance.
Partner with a specialist commercial insurance broker who understands your market sector and the risks that you face, to ensure that your commercial property insurance is just one of the covers within your risk management solution.
At Barnes Commercial, we work in partnership with our clients to explore commercial risk across your entire business and would be pleased to help you secure the right insurance for your unique needs. Contact us on 01480 272727 or send us an email at firstname.lastname@example.org for a no obligation risk review.
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