by Roger Van Praet, DipCII, FUW Insurance Services Ltd Non-Executive Director<\/b><\/p>\n
Insurance is an essential business component, transferring risk and providing much-needed financial security. However, for insurance to fulfil its objectives, the cover you purchase needs to accurately reflect your business requirements. Insuring assets and buildings for incorrect values, or setting cover limits too low, is likely to result in underinsurance.<\/span><\/p>\n Underinsurance can lead to policies not operating as intended, delivering less indemnity than needed following a loss, and jeopardising your farm business\u2019s ability to recover. Despite its serious consequences, underinsurance remains common. Recent research by Zurich suggests that underinsurance was a feature in 79% of cases.<\/span><\/p>\n Underinsurance is a perennial problem within the agricultural sector in particular. It is difficult to understand why the issue seems to have such a low profile when it poses such a threat to your business survival and its on-going success.\u00a0<\/span><\/p>\n Underinsurance occurs when cover is set too low to adequately meet a policyholder\u2019s needs. Below are some examples that demonstrate how underinsurance can affect different types of insurance cover:<\/span><\/p>\n <\/p>\n Ensuring sums insured are accurate will mean claims run more smoothly and achieve the best outcomes for customers.<\/span><\/p>\n Many factors determine the true rebuilding costs of farm buildings. The current serious labour shortages and materials supply issues due to Brexit, the Pandemic, HS2, shortage of drivers and general demand presents new challenges.<\/span><\/p>\n <\/p>\n Buildings – it\u2019s not just the building itself<\/b><\/p>\n A \u2018building\u2019 applies not just to a main structure, but also includes features such as foundations, boundary walls, drains, landscaping. Not including such features is a frequent source of underinsurance. Precisely what is included will be defined in your policy wording.<\/span><\/p>\n <\/p>\n Buildings – don\u2019t use market value<\/b><\/p>\n A building\u2019s market value is irrelevant for insurance purposes, and its use for building sums insured is a frequent source of underinsurance. Buildings sums insured need to reflect the full cost of reinstating a building following a total loss. Other factors to consider in determining appropriate Rebuilding Costs\/Sums Insured:<\/span><\/p>\n <\/p>\n Basis of Settlement:<\/b><\/p>\n Reinstatement is always the preferred outcome.\u00a0 That is rebuilding or repairing to a condition equivalent but not better or more extensive than before. Insurers will usually agree to reinstatement on another site at the same cost if the damaged building is beyond repair and inconveniently located for current farming practices.<\/span><\/p>\n Some insurers will offer settlement on the basis of \u2018Modern Materials\u2019 which is cover based on the use of modern materials and techniques to reduce costs. Substantial repairs of traditional buildings will be undertaken with modern materials. This can often appear attractive at the time of proposal as rebuilding costs of traditional stone\/brick and slate buildings with modern materials is significantly less and consequently premiums are less. However, Modern Materials wording cannot always be relied upon.<\/span><\/p>\n What happens when the insured has to reinstate with traditional materials?<\/span><\/p>\n Each building will have features that can significantly alter a reinstatement cost, such as difficult site access, period features or specialist construction techniques. A qualified surveyor will have the expertise to identify and quantify these factors, and one should consider appointing a surveyor when establishing rebuilding costs\/sums insured for insurance purposes of traditional or specialist buildings.<\/span><\/p>\n <\/p>\n Stock in Trade, Feedstuffs, Plant and machinery and other equipment<\/b><\/p>\n\n\n
\n Declared Farm Buildings reinstatement value on Policy Schedule<\/b><\/td>\n Actual Farm Buildings reinstatement value at risk<\/b><\/td>\n Indicative Cost of repairs following an insured loss<\/b><\/td>\n Claim settlement by insurer<\/b><\/td>\n Financial shortfall for policyholder<\/b><\/td>\n<\/tr>\n \n \u00a3150,000<\/span><\/td>\n \u00a3300,000<\/span><\/td>\n \u00a330,000<\/span><\/td>\n \u00a315,000<\/span><\/td>\n \u00a315,000<\/span><\/td>\n<\/tr>\n \n Estimated by policyholder at inception of cover and declared as buildings Sum Insured<\/span><\/td>\n True reinstatement cost assessed by expert opinion at time of loss based on current rebuilding costs and including site clearance, debris removal, planning, constraints and other factors<\/span><\/td>\n Policyholder suffer significant Storm and Tempest damage on buildings. Estimated repair costs are \u00a330,000<\/span><\/td>\n Underinsurance \u2018Condition of Average\u2019 applies. The final settlement is proportionally reduced to \u00bd of the claim value<\/span><\/td>\n Policyholder is left short of \u00bd of the funds needed to complete repairs with significant financial impact on business<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \n
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