Getting your sums insured right is critical if you have to make a claim, but most business owners find them hard to evaluate and many overlook or forget what they need to do.
These figures form the foundation for your ability to recover from damage or interruption to your business so it’s worth taking the time to ensure they are accurate. These tips will help you navigate the essential requirements.
What is the sum insured?
Sum insured refers to the maximum amount your insurer agrees to pay to replace your business property and assets, including buildings, contents and equipment, if they are damaged or destroyed.
The scope of damage covered can include
riots or industrial disputes
goods damaged in transit.
What you need to check
It’s important to keep assessments of your commercial property value up to date and to renegotiate the limit of insurance on your sums insured at renewal because if you are insured for less than the cost of replacement you could incur a penalty under co-insurance terms.
What is co-insurance?
A lot of property policies contain co-insurance terms which come into effect if the amount the property is insured for is less than its value. Most policies require this amount to be at least 80% of the full value but some business owners opt to insure their property for less in order to pay a lower premium.
The penalty kicks in if you have to claim. You will not only be short on the insured value, you also will receive less in the claims settlement as the insurer will only reimburse you the proportion you are undersured for. For example, if the full value of your property is $1,000,000 and you only have a sum insured of $500,000, you will be self-insured for 50% and so in the claim settlement you will only receive 50% of the amount of the claim.
What you need to check
It is recommended that you obtain updated valuations on property at least every three years. It is important to check your valuations are for insurance purposes (insurance cost assessments) so you are insuring for replacement cost, not market value or accounting depreciated values.
What is agreed value?
Insuring your business property for an agreed value avoids the co-insurance issue, provided you meet certain requirements. These involve preparing a statement of values: a list of your insured property that assigns an amount to each item. It can be based on the cost of replacement or actual cash value: cost of replacement less depreciation during its period of use.
You may also need to provide an assessment of your business income and expenses for the previous year and also project ahead for the period of the policy.
What you need to check
This agreed value will apply for the term of your policy and you will have to prepare an updated statement of values before your current policy expires and has to be renewed. Depreciation of the property should be taken into account.
“Why you can’t set and forget? Because your business is constantly changing, as is the economy in which it operates. Your cover needs to reflect these fluctuations and their impact on the insurance you need in order for you to be properly covered.”
Jamie Mackenzie, Claims Loss Preparer, Gallagher
Sum insured for business interruption
While commercial property insurance safeguards your business against physical damage or loss, you still need to protect yourself against the flow-on impact to your ability to continue trading.
Business income protection insurance covers you for a nominated period (indemnity period) for lost or reduced income (gross profit) and your running costs during enforced downtime as a result of
damage to your premises
damage to equipment or machinery
inability to access your business premises or mandatory evacuation by order of the authorities.
What is gross profit?
The amount of your gross profit sum insured is based on your primary source of income, via fees for your business services or sales revenue from products or stock. It’s important to note that there’s no tolerance for underinsurance in business interruption.
To ensure this amount is accurate and avoid falling into the underinsurance trap, it’s advisable keep quarterly records that enable you to stay current with seasonal fluctuations, and notify your insurer if the value increases.
What are running costs?
Your sum insured for running costs should include your regular overheads such as
premises and utilities
supplies and payments on property, plant, equipment and vehicles
wages and tax
seasonal expenses, such as extra staff, for example.
Keep records of the additional costs you incur getting or keeping your doors open for business. These might include emergency measures for sourcing supplies, renting alternative premises or equipment, or outsourcing some functions.
Why the indemnity period is critical
Underinsurance for business interruption is common because as well as underestimating their sums insured, business owners often don’t allow enough time for recovery after extensive damage – or a complete rebuild.
Nominate an indemnity period that’s realistic in a worst case scenario. It should reflect the period of time it would take you to get back to a ‘pre-loss’ position taking into account factors such as submitting plans for Development Approval, potential delays with sourcing contractors if a catastrophe affects multiple businesses, etc.
Talk to an expert
Getting the terms of your property and business interruption insurance right and making sure the sums are accurate is crucial to receiving the protection you're seeking, but it is a complex process and having someone outside of your business helping make these assessments can help ensure you don't overlook something vital.
An insurance broker who knows your industry and business can provide invaluable guidance and advice to help you get your sums insured right because they understand exactly the information required.
To the extent that any material in this document may be considered advice, it does not take into account your objectives, needs or financial situation. You should consider whether the advice is appropriate for you and review any relevant Product Disclosure Statement and policy wording before taking out an insurance policy.