Commercial buildings are a major asset for any business, so it’s important to make sure you have the right insurance in place to protect them. If you have buildings underinsured, this can result in devastating financial losses in the event of a disaster.
In this article, we explore the risks of underinsuring your commercial buildings and outline some practical tips to help you avoid these risks.
What is classed as a commercial building?
Commercial buildings can include office spaces, retail stores, hotels, surgeries, warehouses, industrial facilities, and any other type of building that is used for business purposes.
It’s worth keeping in mind that any property that is leased by a landlord for business use is also considered a commercial building.
What does it mean to have commercial buildings underinsured?
If a building is underinsured, it means that the sum insured on a property or asset does not reflect the actual replacement cost.
Your commercial buildings need to be insured for the cost of rebuilding them in the event of a disaster, not the market value of the property.
What is the difference between underinsurance and inadequate cover?
Underinsurance and inadequate cover are two different types of risks that businesses face when it comes to commercial insurance. Underinsurance is the act of having an insurance policy with a value that is lower than the actual cost of replacing the assets insured.
Inadequate coverage, on the other hand, is when a business has an insurance policy but may have coverage gaps that can lead to the holder being liable for most costs given certain events.
How does underinsurance occur?
Underinsurance can happen for a variety of reasons. One is that business owners may not be aware of current market costs and underestimate the cost of rebuilding or replacing their property.
Additionally, some business owners may not want to pay for higher insurance premiums and opt for a lower sum insured instead. Unfortunately, this can leave businesses vulnerable in the event of a claim.
The risk of this occurring has been escalated by the pandemic, Brexit and the war in Ukraine as there has been a sharp increase in labour and building material costs in recent times.
Overall, rebuilding costs have increased by 21% since 2016 — this makes it even more important to review building sums insured to confirm that they would be sufficient to cover the total reinstatement cost of a property if it were destroyed.
The dangers of commercial buildings being underinsured
The biggest risk of being underinsured is not being able to fully recover financially in the event of a disaster. This can happen if the insured value does not reflect the true cost of rebuilding or repairing the commercial building. For instance, if a fire destroys your office building and it’s underinsured, you may not have enough money from the insurance payout to rebuild it.
Another risk is legal ramifications, particularly in the case of commercial leases. If a leased commercial building is underinsured and suffers damage, the lease may require the landlord to restore it to its original condition. Without enough insurance coverage, they may not be able to meet this requirement. This could lead to disputes or even legal action.
Underinsurance can also lead to businesses being sued by third parties. For example, if a commercial building is destroyed and the business does not have enough insurance to cover the cost of rebuilding, the owner of the building may sue the business.
Here is an example of the consequences of your commercial building being underinsured:
If your office is insured for €60,000 but the cost of rebuilding it would be €100,000, then in reality that means it is only 60% insured.
If a leaky pipe causes damages totalling €40,000, then only 60% of that amount will be paid out (€24,000). You will have to come up with the other €16,000 yourself, and this could potentially annihilate your savings and lead to the ruination of your business.
How to avoid having your commercial buildings underinsured
If your company has undergone recent changes like increased assets or stock, you will need to change your sums insured (or estimates) accordingly.
For example, let’s say that due to high demand for your products or services, you now carry twice as much inventory as before. In this case, you would need to adjust your existing insurance policy so that it covers the new value of your goods.
Here are two practical tips to help you avoid falling into the trap of being underinsured:
1. Regularly review and update your insurance policies – or risk having buildings underinsured
You want to make sure that they still reflect the current value of the commercial building. This includes considering factors such as construction materials, labour costs and business growth. It may also be necessary to seek professional advice from a surveyor or architect to ensure the insured value is accurate.
A good commercial insurance broker should be able to assist you with keeping your policies and coverage up to date so that they continuously reflect your current circumstances.
2. Make sure that you have an accurate estimate of replacement costs
Get a replacement cost estimate from a qualified professional to confirm the correct insurable value of your commercial building, and set your sum insured value at this amount or higher.
This will give you peace of mind that your insurance will cover the replacement costs and prevent liability claims in the event of a loss or disaster.
Avoid being underinsured with Commercial Property Insurance from ERM Financial Services
At ERM Financial Services, we have been providing Irish businesses with comprehensive and competitive commercial insurance for almost 30 years.
Our commercial insurance coverage gives you everything you need to safeguard your business. Partnering with us will give you the peace of mind that your commercial buildings are adequately insured, allowing you to focus on growing your business.