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Arborist’s Hidden Threat – Underinsurance

Underinsurance occurs when an individual or business has insufficient insurance cover to fully protect against potential losses. High inflation levels in recent years have made this a common problem.

Underinsurance doesn’t occur by chance. It stems from a need for more awareness of how insurance operates, plus a misguided belief that minimal coverage is sufficient. Sometimes, business owners opt for cheaper insurance policies without fully understanding the extent of their exposure. Others might gradually request a lower sum insured to save costs, believing that losses are unlikely. However, you could be underinsured if the equipment and asset values were incorrectly insured at the start, or if valuations have changed over time due to inflation.

The significance of underinsurance cannot be overstated. It’s a critical issue affecting millions of individuals and businesses worldwide. The data highlighting its serious nature is staggering.

  • Charterfields Chartered Surveyors, report 42% of plant and machinery locations they surveyed were underinsured by more than half their value.
  • According to the Chartered Institute of Loss Adjusters, underinsurance exists in over 40% of claims, with underinsurance typically between 35% to 40%.

The impact of underinsurance could be catastrophic for many businesses. In a survey by Aviva, over 500,000 companies (10% of UK businesses) have said they would not be able to survive if they needed to pay out up to £10,000 towards a claim that wasn’t fully covered by insurance. 

However, the consequences of underinsurance can also extend beyond immediate financial problems.

  • Repairing or replacing expensive equipment for which you need to be adequately insured can strain budgets, impacting overall productivity and your ability to operate at pre-loss levels.
  • Disappointed customers will inevitably result in reputational damage that will be difficult to recover from.
  • Consequential loss of revenue can lead to cash flow problems.
  • This could quickly cause business owners and their employees significant stress, resulting in low morale and potentially the loss of key employees.

An Underinsurance example

A tree surgeon’s chipper is stolen. He insured it two years ago for £3,000 and made a valid claim for the same amount. However, because prices have been increasing significantly over the past two years, the market value of the chipper has risen to £4,000. In this scenario, the chipper is now inadvertently underinsured by 25%.

When the insurance provider accepts and processes the claim, they apply the ‘underinsurance clause’. This means that the payout would likely be 25% less than the £3,000 requested so that the claimant will receive only £2,250 (less the excess).

Returning a business to normality following a loss can be challenging and take a long time without adequate insurance. Is it not better to safeguard against this from the outset?

It is crucial to determine whether you have adequate coverage so don’t wait until your policy renewal email arrives – review your sums insured regularly, ideally quarterly, and consider whether there have been any changes to your business since you took out your policy.

If you need any help, discuss it with your insurance provider. They should be able to advise you on how the market has moved and whether you have the right levels of cover for your assets and business interruption.

Arborisk plant and tools cover uses the item’s market value at the point of claim to determine the value of any claim payment made.

Arborisk is here to help all our customers and provide them with peace of mind. Contact one of our trained account handlers, who can support you in making informed decisions to safeguard your financial well-being.

For more information about the above, please get in touch

0113 259 3560
Broadway Hall
LS18 4RS

0113 259 3560
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