What is underinsurance?
Underinsurance occurs when the sums insured are no longer sufficient to cover your motor trade or classic motor trade business or personal interests. In the event of a claim, the claim would exceed the maximum amount that can be paid out by the insurance policy.
There could be several reasons for this, the most common being:
- Additional storage facilities
- Increase in the number/value of vehicles in your possession
- Purchase of extra equipment or tools
- Other significant changes to your business
If your insurance is insufficient then any claim will not be paid in full. For example, if the cost to rebuild or replace your premises, showroom, and/or its contents is £500,000 but you are insured for only £250,000, then you would effectively be underinsured by £250,000 or 50%, leaving you to pay the rest of the claim yourself.
Is this really a problem?
Yes, most definitely!
According to Aviva*, out of 177 cases, Aviva’s own risk management surveyors found that commercial customers had underinsured their businesses by an average of £486,000 each.
It can also lead to serious financial crisis depending on the size of the cover or asset being insured and the extent of the shortfall in insurance. In some circumstances, your insurer might even cancel your policy completely or may impose a penalty by reducing its liability for a claim.
What are the main underinsurance issues facing motor traders?
There are several areas of underinsurance motor traders could face. Two of the most likely are insufficient buildings cover and an inadequate indemnity period for business interruption cover.
A motor trader had a fire at their premises and lost everything. When they took out their insurance, they had decided that they could recover from a serious fire within 12 months and had taken out business interruption insurance to cover them for loss of income only for that period.
Unfortunately, the buildings sum insured was inadequate, meaning that they had to fund part of the rebuild themselves. Also, because of the extent of the damage and their location, they had to reapply for planning permission. The time taken to achieve the clearance of the site, engage architects, agree plans, obtain planning permission, arrange builders, have the new building constructed, and purchase replacement tools and equipment meant they significantly exceeded their original 12 months estimate, and they were left with no income for many months.
How do you know you are underinsured?
If you answer ‘yes’ to any of the below, you should consider having your motor trade or classic motor trade policy reviewed:
- You have not reviewed your sums insured for a couple of years
- You have made alterations/additions to your workshop, garage or storage unit(s)
- You have purchased extra tools/equipment
- You have more customers’ vehicles in your care than when you took out cover
- You have finished a restoration project, which has increased the value of the vehicle
- Your buildings insurance is based on market value instead of rebuild cost
- You only have a 12-month indemnity period (that’s 12 months from the date of the incident) on your business interruption cover, or no cover at all.
Aston Lark is here to provide you with advice and guidance on your insurance and to assist you with understanding where you may be uninsured.
If you’re a motor trader and you think you might be underinsured, call 01732 872 899, or email [email protected]
If you’re a classic motor trader, call 01252 377 546 or request a call back from our Classic Motor Trade team.