The importance of ‘Sums Insured’ for your SME - by Lisa Carter
Sums Insured might seem a confusing term at first, but it’s really easy to understand and can be the difference between having the right amount of cover and being underinsured. At Insurance Advisernet, we know that many SMEs don’t have enough insurance cover, leaving them over exposed to a wide range of risks.
Just imagine how you would feel if your warehouse burnt to the ground and you were only insured for $500,000, but it’s going to cost you $1,000,000 to replace the building and contents. That’s what being underinsured means and where the term Sums Insured becomes important.
What does Sums Insured really mean?
Sums Insured is the maximum amount of money your insurance provider is willing to pay on a claim for your business. This includes payouts for your buildings and their contents, as well as equipment and other business related assets. Whatever property policies you have for your business, each will have a maximum amount of money that will be paid for each loss and is called the Sums Insured. However, if you don’t know the value of the buildings and other assets you want insured, you can’t be sure that the Sums Insured is correct, leaving you potentially underinsured.
Ensuring that your Sums Insured are always accurate
The only way to make sure that your Sums Insured are accurate is to regularly have all your business assets valued and use these valuations to make the relevant changes to your policies. If you don’t keep your Sums Insured up to date, there’s something called the co-insurance clause that can make matters even worse. This clause comes into play if you make a claim, but when the Sums Insured is less than the actual replacement value. For most property insurance policies, the Sums Insured must be at least 80% of the actual replacement value and if it’s less than this value, you will only receive 50% of the amount you are claiming.
This is a penalty that applies to businesses that are underinsured. In real terms, this means that if your building costs $1,000,000 to replace, your Sums Insured must be at least 80% of this value, meaning you need to purchase cover to the value of at least $800,000. Of course, the greater the Sums Insured, the higher the premiums, which is why some SMEs are underinsured.
The problem arises when you make a claim, so if the replacement cost for your building is $1,000,000, but your Sums Insured is only $500,000, you have a problem. That’s because your insurance provider may decide that in this situation where your Sums Insured did not reach the 80% or $800,000 threshold, you are underinsured by $500,000 or 50% (in other words you are self-insured for 50% of the building’s $1,000,000 value). So your insurer activates the co-insurance clause and only pays you 50% of your Sums Insured, which is $ 250,000!
To avoid this happening to you, we recommend that you have these valuations performed at least every three years and that they are for replacement costs, not current market value. To avoid the co-insurance clause being activated you can even insure your buildings and assets for an Agreed Value, provided you meet certain requirements.
Working with an insurance adviser means they can highlight areas where you may be underinsured and work with you to have these evaluations take place. This is just one of the areas they can assist and provide their expertise. To review your business and assets, talk to an insurance specialist today, contact Lisa Carter of Clear Insurance.