Construction businesses have been some of the worst impacted by the economic climate and in 2022 alone, the sector experienced the highest number of insolvencies1.
According to Begbies Traynor latest Red Flag Alert Report, more than half a million firms are in significant financial distress, with the construction sector ranking third in the top 10 sectors affected2.
The main reasons for this include supply chain challenges, shortages in materials which has caused numerous delays and the scarcity of labour. The backlog of projects following lockdowns and the repayment of COVID-19 support loans have also significantly impacted businesses in the construction industry.
In this blog we cover how these global events are impacting your businesses insurance programme and the risk of underinsurance.
How have increasing costs and inflation rates affected insurance?
If you apply the rates of inflation seen in the construction sector to the material damage sections of an insurance policy, the level of sums insured would be significantly short of where the business needs it to be. For example, a yard that was worth £1M in rebuild costs when the policy went live, could now be worth £1.5M.
Furthermore, we have had several new clients approach us and when reviewing their business’s existing levels of cover, we have identified gaps of over 50% in their commercial rebuild property cost. Read more about this here.
The risks of underinsurance
If your business is underinsured and you need to make a claim, you could find the expected settlement to be dramatically reduced as insurers can apply the Condition of Average.
What is the Condition of Average?
Most UK insurance policies will be subject to the Condition of Average. This means where the sum insured is not enough to cover the full cost of the claim, insurers can reduce their liability by discounting any settlement by the proportion of underinsurance. For example:
- The sum insured for stock of materials = £100,000
- The actual value of materials due to inflationary changes over time = £125,000
- Theft of materials results in a £50,000 loss
- Claims is reduced by 25% and settlement offered of £37,500
- Business suffers an uninsured loss of £12,500
The issue of underinsurance is so prevalent that the Financial Ombudsmen Service (FOS) includes guidance to this subject on their website.
The FOS guidance concludes that it is reasonable for insurers to apply the average clause if the customer was:
- asked to confirm the total replacement or rebuild cost
- given clear guidance on how to calculate those figures
- clearly told about the consequences of providing incorrect figures
Underinsurance has the ability to leave a business liable for hundreds of thousands or even millions of pounds. Furthermore, under the Insurance Act 2015, policyholders have a duty of fair presentation of risk requiring them to disclose every material circumstance they know or should know. If an insurer believes the underinsurance is because of the policyholder’s deliberate or reckless breach of this duty, the policy can be void, with no return of premium. They can even look to prosecute if they believe the sums insured were deliberately understated.
How to tell if your business is underinsured
You should work closely with your insurance broker throughout the year advising them of changes, and ideally have a quarterly review/update to ensure you have the correct level of cover in place.
You should also conduct a thorough review of your insurance programme every year in advance of renewal to ensure your business is appropriately protected, whilst considering emerging risks such as cyber. In addition, if anything changes during your insurance period, you should let your broker know immediately as they can advise if this change affects your insurance coverage.
It is also recommended to get your property valued by a professional. The latest data from RebuildCostASSESSMENT.com reveals a huge shortfall in cover among UK commercial properties, with insurance valuation providers estimating that buildings occupied by businesses in Britain are underinsured by a worrying £375 billion3.
We are here to help
Specialist Risk Insurance Solutions (SRIS) specialise in arranging robust insurance programmes for a variety of trades in the construction sector, including builders merchants and suppliers, having worked with businesses in the industry for over 50 years.
We also work with multiple trade associations such as CONSTRUCT, NFDC, and The Builders Merchants Federation, offering members bespoke solutions to protect their businesses.
Our specialists can confidentially review your sums insured to confirm you have the correct level of cover in place, ensuring your business is not left out of pocket should you need to make a claim. Fill in your details below and we will be in touch with you to discuss this further.
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