Under-insurance: A critical business risk
According to leading short-term insurance administrator, CIB Insurance Administrators (CIB), South African businesses are increasingly at risk because they are under-insuring their buildings. According to Andrew Lilley, a director at CIB, recent reports of under-insurance highlight how important it is for brokers to educate their clients on the impact and far reaching consequences of under-insuring their assets.
He says that over the past couple of months, CIB has noticed that a number of business owners have incurred substantial financial losses because their properties are significantly under-insured. “As a result, the claim settlements have been far less than what the client expects to receive, leaving them at times up to 40% out of pocket.”
Lilley says it is therefore crucial that a value risk survey or assessment be conducted before a policy is incepted, to ensure that commercial premises are correctly valued and that they are then insured for the replacement value of the property, rather than the market value.
He cautions that property owners often insure their properties according to a perceived value, which presents a huge business risk in the case of loss or damage, especially if there is a large percentage of under-insurance and the business owner cannot afford the difference in the claims settlement versus the actual loss suffered. “It is the broker’s responsibility to ensure that the business owner is advised correctly on the basis of cover of premises insurance. If not, the under-insurance can dramatically influence the cash flow or even the sustainability of the company.”
He says business owners should be alerted by their broker to key factors that could affect their insurance policies, namely escalating building materials and labour rates, inflation and additional costs such as professional or legal fees or demolition, as well as debris removal costs, which alone can add up to 20% of replacement building costs.
Lilley advises that clients should be encouraged to be more mindful of updating their insurance policies on a regular basis and ensure that they do so accurately to reflect renovations and extensions.
He says that in these tough economic times, business owners sometimes deem insurance premiums to be too expensive and, to save minimal amounts on monthly payments, are prepared to put their business at risk by choosing to under-insure their valuable property. “Brokers need to ensure that their clients are fully aware of the consequences of these actions and advise them on the correct path to be taken when it comes to building insurance,” concludes Lilley.
Epic Communications (Pty) Ltd
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