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Underinsurance is a major challenge for small business owners, sole traders and insurance companies in New Zealand. It can lead to reduced claims settlement amounts for business owners. It will leave you out of pocket after a claim. You’ll want to avoid getting caught in the underinsurance trap. In this paper, we’ll show you how.
What Is Underinsurance?
Underinsurance occurs when a customer does not buy enough insurance to cover their business assets and liabilities. It happens because the sum insured selected by a business owner is too low to replace, repair or rebuild their business premises.
Underinsurance can also occur with business interruption insurance when the indemnity period selected is too short. In business interruption insurance cover, the indemnity meaning equates to the period of time that it will take your business to return to normal trading and profit following a loss.
Many businesses in Christchurch found themselves underinsured following the Canterbury earthquakes natural disaster, having underestimated the time it would take to return to full trading conditions.
Underinsurance can also occur with public liability insurance when the limit of indemnity selected is too low for your business. Many businesses know that a $2m limit of indemnity will be adequate if a single incident involving a single customer occurs. But what would happen if a single incident involves multiple claims, or if multiple incidents occur in a year?
If I’m Underinsured, What Will Happen To My Claim?
If an item of equipment or stock is damaged, your insurance company will assess the value of your total assets and stock. They will compare it to how much business insurance cover you have purchased.
If your commercial property and assets are valued at $200,000 and you have insured for $100,000 or 50% of the total value, they are likely to pay only 50% of the cost of repair or replacement after you also pay an excess.
Likewise, if you have purchased public liability insurance for a business to a limit of indemnity of $2m and incur a claim and defence costs in excess of that amount, you will find yourself paying the amount in excess of $2m.
How Can I Prevent Being Underinsured?
There are several basic steps to avoiding underinsurance with material damage, business interruption and general liability insurance for businesses. You should read our policy wordings for terms and conditions before getting insurance quotes online.
At Insure Online we have produced a one-page checklist for NZ insurance policyholders and their accountants to use in order to calculate how much cover they need for their business. If you would like a free copy of our business insurance checklist, please click here and we will email a copy to you. or please contact us on 0800 456 780.