Building on fire

Business Interruption Average Clause

So you have made a claim and your insurance company have agreed to pay, but not for all of it.

The reason they say, is that you are under insured; your opinion of course is that you insured the item for £1,000 and ok you now know that it was actually £1500 to replace but as far as you are concerned you will accept the £1,000 because that’s what you have insured for, right?

Err, well no actually… you might think that’s how it works and you are certainly not on your own. Remember someone mentioning “average clause” to you when you was having your rant about not getting your full amount, and no average isn’t something that’s sort of “in the middle” when it comes to insurance.

Sitting comfy… here we go. When you take out an insurance policy you have to insure that item, (lets say your home in this case or perhaps a piece of machinery for business) for its full ”reinstatement” cost, that’s the replacement cost “as new on a like for like basis” that is the same without betterment. Now for a very simple example, amounts are rounded for simplicity.

You insure your house for £100,000, your roof blows off in a storm and the replacement of the roof is £3,000, nice Mr Loss Adjuster comes along, he has no problem with the replacement of the roof at £3,000 however he knows a thing or two about houses and rebuild costs and informs you that the rebuild cost of your home is actually £200,000. The result is that you are 50% under insured and your £1500 cheque is in the post.

Oh dear, and what’s worse is that this could be your business premises, what do you do then? You have a fire which all but destroys your premises, the consequences could be grim and if the shortfall is so much that you have to raise further capital you don’t really have to many assets left.

Businesses are somewhat different to private property although the principals are very much the same, business interruption insurance, stock, machinery and plant; all have the same practice applied. AVERAGE

So how can you avoid being under insured?

Buildings, DO NOT base your sum insured on the sale or purchase cost, it’s very unlikely that this is going to be even close.
DO NOT have a guess at the rebuild, unless you are a surveyor it’s likely that you will be wrong.
DO NOT assume that your builder mate is correct.
DO employ the services of a qualified surveyor – they have a very high probability of being right (its their job)
DO speak with the surveyor that dealt your the purchase of the property, they may not have indicated a “reinstatement” cost in the report but they will be able to do that for you as they will more than likely have the full details of the premises.

Although the above do’s and don’ts refers to bricks and mortar as such it pretty much applies to everything (there are something’s that it doesn’t apply to but we won’t get that deep). Make sure that machinery in a business for example is kept up to date, machinery becomes obsolete very quickly and so that 3 widget reciprocating gyro thingy is now superseded by a 4 widget gyro thingy – know your machinery, know the reinstatement costs and KEEP YOUR SUMS INSURED UPTO DATE.

And finally for the few of you who have seen a potential scam coming on… insuring for twice the amount will certainly not get you twice the payout, they cottoned on to that one back in the 18th Century.