By: Bertus Visser, Chief Executive of Distribution at PSG Insure
When it comes to working out insurance claims, insurers rely on averages.
Consider your commercial property – imagine R1.5 million is the value you have chosen to insure your equipment and office supplies in your insurance policy, but the true replacement cost comes to R3 million. If a fire, storm damage or crime causes damage to your contents, you are likely to come up short when you claim – by at least half.
The principle of averages applies: essentially, the percentage by which you are underinsured will be applied to your claim, reducing it. For example, if you are 20% underinsured, only 80% of your claim will be paid. It doesn’t work the same way for overinsurance (you won’t get a 20% higher payout) but underinsurance can be just as financially devastating when it comes to your building insurance, protecting the physical structure of your commercial space.
The value of your property and the items inside will fluctuate and the way these are determined will differ, depending on your policy. Insurers also calculate value in different ways, so it’s important to understand how your cover works. They might look at square meterage, the cost of your architect, municipal fees or demolition costs. It is recommended that a commercial property be re-evaluated every three years to ensure the insured value keeps pace with the factors that go into its true replacement cost.
Insurers work annually with inflation to determine the value of commercial buildings. So if, for example, cosmetic changes were made to your property, these should be factored into your cover, with inflation taken into consideration too. This will prevent any shortfalls, and remember that VAT needs to be accounted for in the valuation as well.
How uncertainty has played a role in underinsurance
The emotional uncertainty around lockdown, particularly at the higher levels, and the financial impact it has had on household budgets, are stressful factors to face. Business owners were not sure when they would open (some are running on lower capacity or continue to work from home). This has had an impact on specified assets like cell phones, tablets and laptops, as well as vehicles.
Some clients downgraded from comprehensive cover for vehicles to third party, fire and theft, or third party alone. Big truck companies, for example, had many vehicles that didn’t move for months and insurers have rallied to support clients where possible, especially if mileage is low or down altogether. The decisions to reduce cover like this had a positive impact on budgets, and were perhaps the best options at the time, but the festive season is right around the corner and economic activity is ramping up. This time of year is notorious for more claims to arise. So, it is important to revisit the cover levels to see if it is adequate for your possible exposure if there is a loss event.
Don’t let your trade fade
Some businesses require trading stock insurance and if this was decreased during lockdown because operations decreased too, you would need to review your cover once you’ve reopened and things returned to normal. If you’ve forgotten to reinstate cover for your business, act soon, as these types of businesses tend to be targets for crime during the festive period. The risks could be heightened during tough economic times like we are currently experiencing, because opportunistic crime increases.
It is very important to note that if you do not review this cover now, there could be resistance from insurers to cover you during December and January. Prioritise your short-term insurance like you would anything important and essential in your business.
Get the right guidance
Your adviser needs to know what assets you have, so that they can be as thorough as possible in providing the right advice. Imagine your office or factory being picked up as a physical building (picture it as Monopoly-sized, if that helps) and turned upside down. Everything that could fall out is essentially what needs to be factored into your contents insurance. Everything making up the structure needs to be included in your buildings insurance, both with realistic replacement costs in mind.
While a commercial property might need a valuation every three years, your insurance policy needs at least an annual review. It’s a bit like going to the dentist. No one really enjoys having to go but the protection it provides is worth the stress of going. Your annual review is like the yearly dentist check-up to ensure everything is still on track. You may need more than one review if you purchase new property or have some professional, lifestyle or income changes along the way.
Don’t let the law of averages work against you when it comes to getting the right cover in place. Up-to-date insurance is on the list of must-haves to make it through the festive season and into what will hopefully be a better and prosperous new year.