Underinsurance is a trap for business owners and individuals alike. So, how do you know if you’re underinsured and what can you do about it?

Underinsurance is when you lack adequate coverage for your legal liabilities or the cost of loss or damage to your assets. You are at greatest risk of underinsurance if you haven’t updated your insurance to reflect growth in

your business or appreciation of your assets, your sums insured are based on outdated replacement costs, or you haven’t considered all risks that could result in financial loss.

These scenarios can result in adverse financial consequences at claim time, leaving you short of money and options at a vulnerable time.

We know the risk of underinsurance is greatest in a hardening insurance market when people become more price-conscious and may be tempted to deliberately underinsure, or they simply underestimate the true cost of replacing their assets or covering their liabilities.

Regular reviews are key

Allow plenty of time prior to your renewal to check your current sums insured would be adequate in a total loss claim and obtain any valuations. It’s important to read your policy wordings to understand what your obligations are to your insurer when it comes to valuations and to provide all supporting information when requested.

Keep your broker up to date with any changes to your business or personal assets, especially if you are making changes that will affect the value of your property or business assets.

The importance of sums insured

The sum insured is the maximum amount an insurer will pay. For example, in a total loss claim, the sum insured needs to be sufficient to rebuild your home to the size and standard it was prior to the loss, allowing for inflation, demolition costs, professional fees, and any outbuildings covered by the policy.

Remember, the drivers of a hardening insurance market – inflation, supply chain disruptions, the increasing cost of claims, and rising reinsurance costs – also drive the risk of underinsurance, so it’s possible the sum insured may already be outdated by the time your policy renews. Seek advice early and take the time to get it right.