Commercial Property Insurance – Underinsurance

A recent survey carried out by Building Cost Information Service found that 80% of commercial properties are underinsured.

Commercial property insuranceUnfortunately, in the current tough economic climate many businesses either fail to review their current commercial property insurance sums insured due to time pressures or they are fearful that it will have an adverse impact on their insurance costs.  However, by failing to review your commercial property sums insured you could expose your business to a risk that may be unrecoverable in the event of a severe claim.  In most instances, an increase in your sums insured would result in a modest increase in premium or in some cases may even result in a refund of premium if your property is over-insured.

There is a common misconception that the full reinstatement cost of a building is the same as the market value of the building.  However, this is incorrect as the full reinstatement value should include demolition costs, removal of debris/site clearance and professional fees (surveyors, architects, etc.).  It is important that these additional costs are also included as part of the total buildings sum insured.

Commercial Property Insurance Average Condition

Most commercial property insurance policies are subject to an ‘average’ condition which means that in the event of a claim, if your property is only insured for 80% of its reinstatement value, then your insurers will only pay 80% of the claim.  This applies even when the claim value is well below the full sum insured.

For example, if you had a commercial property claim for £100,000 on a building which is insured for £400,000, but should in fact be insured for £500,000, your insurers would only be liable for 80% of the £100,000 damage.  Therefore you would only be entitled to £80,000.  This is despite the fact the you are well within the £400,000 sum insured.

The average condition is applied to commercial property insurance policies to ensure that insurers receive the correct level of premium for the property being insured.

It’s not just commercial property insurance policies that are affected.  Residential property insurance such as block of flats insurance are also subject to the average condition.

It is important to carry out regular valuations of your property and if you do not have your own property valuer, we will be happy to put you in contact with one.  For more information on this subject, please do not hesitate to contact us.

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