How to avoid underinsurance for your franchise business

Why can underinsurance be a problem?

According to the Chartered Institute of Loss Adjusters, 40% of businesses are underinsured. This means that, should the worst happen, your insurance policy may not stretch to cover the full nature of the loss. This can result in a reduced payout, lost revenue, or even closure of the business.

How does it work?

The formula for calculating underinsurance is as follows: Sum Insured ÷ Replacement Cost = Amount of Underinsurance. Here is an example of how this would be calculated.

For example, if you had a loss of £100,000, you would only be paid 50% of that loss, i.e. £50,000.

Commercial insurance is generally purchased on the belief that you will never have to use it, which is why it is vital to ensure you are adequately protected.

So what can you do to avoid underinsurance?

Valuations

Although many businesses may feel that a rebuilding cost valuation is a waste of time and money, it can prove to be incredibly important. The rebuild cost is different to the purchase price, as the rebuild is not just the bricks and mortar: it also takes into account factors such as labour, materials and architect fees. Having an accurate rebuild cost from a RICS (Royal Institute of Chartered Surveyors) surveyor can provide you with piece of mind and the knowledge that you are adequately covered should the worst happen. My colleagues at Christie & Co offer a range of valuation services.

Think long term

Putting you back into the same situation you were at prior to a loss can take time.  You need to ensure that you have a Business Interruption policy (also known as Loss of Revenue) that will adequately protect you. Do not always opt for the minimum indemnity period of 12 months, just because you feel it is the most cost-effective option. Factors such as a building being listed or of an unusual construction can make the process longer. The key factor to consider is: how long will it take to restore your business to the same position you were in prior to the loss?

Considering additional costs for working expenses can be vital to your business. This can be especially important should you need to relocate to an alternative premises whilst your property is being renovated or repaired. Additional cost of working not only covers the relocation but can also factor in hiring extra equipment and additional staffing costs such as bonuses or overtime.

What else can you do to mitigate the risk?

• Read policy wordings and insurance schedules carefully – sections such as single item limit (the amount paid for one item) vary from insurer to insurer.
• Speak to us – purchasing commercial insurance can be a daunting process, however we have a wealth of knowledge and will search the insurance market to ensure you have the best cover for your needs. We have experience in franchise businesses and can help source the right cover at the right price.