The Importance of Adequate Coverage for Property and Contents

Ensuring adequate coverage for property and contents insurance is an essential part of business corporate governance. Buildings, tenant’s improvements, plant, machinery and general contents represent a significant investment for most companies, and protecting these assets is a core responsibility of directors and senior managers. 

In this article, we’ll explore the challenges in arriving at appropriate declared values, the critical implications of underinsuring assets, and highlight the importance of maintaining adequate insurance coverage.

In recent years higher inflation has exacerbated the issue of underinsurance which has been a characteristic of property damage insurance for decades. 

Surveyors carrying out formal assessment of rebuild costs are finding today that properties, and their contents, are regularly underinsured, with recent research from Charterfields indicating that some 80% of all business locations assessed are underinsured, and more worryingly 40% are insured for less than half of what the true reinstatement cost would be.

Why is this happening?

Many firms have not adjusted declared values to reflect inflation. Even where companies have adjusted for inflation, not all asset costs have behaved the same over recent years and standard ‘indexing’ of values using consumer inflation, or typical building cost changes, may not be appropriate for specific facilities or locations.

Many firms confuse capital expenditure movements and accounting values with the sums they ought to declare to insurers. Reinstatement insurance policies require insured values to be on a ‘new for old’ basis, often having no bearing to current book or market values. Some capex is also replaced by nature (e.g. an office refurbishment) that can have little or no impact on values at risk. 

Businesses often forget to include expensed, or leased and rented, assets in their declared values to insurers. While not appearing in fixed asset registers, a business would need to replace these items following a loss. For locations with large numbers of pallets, forklift trucks, vending machines, etc, these amounts can be substantial and a significant proportion of the total value at risk.

If an insurer has changed at the last renewal, the details of an insurance policy may have changed, including changes to inclusions and exclusions, definitions of buildings and average clauses. These may have impacted how declared values are to be shown.

Building and other regulations are continually evolving, and these changes may not be reflected in current declared values. 

International trade and supply chain dynamics could impact the replacement costs of building materials and equipment due to shifts in tariffs, transportation costs, and duties.

Changes in foreign exchange rates could materially affect replacement in the event of a loss for overseas sourced equipment.

Construction methods and technology also continually change, meaning that the cost to reinstate facilities could be different to previous estimates.

Finally, if a client has multiple sites, contents and equipment can move around locations meaning that while the overall sum may be correct, individual site values may be incorrect, exposing the business to risk of under (or over) insurance.

So why is adequate coverage an issue for businesses?

1. Financial Security 

Insufficient insurance coverage for fixed assets exposes businesses to the risk of inadequate financial protection. In the event of unforeseen circumstances such as natural disasters, accidents, or theft, a shortfall in insurance coverage may leave companies shouldering the burden of additional replacement or repair costs.

2. Operational Resilience

Where insurers may perceive underinsurance, there can be delays to settlements which can impact a business’s ability to quickly recover from an incident. Negotiations with insurers can be protracted, leading to delays in recovery efforts, in turn causing operational disruptions. Businesses can experience significant downtime, resulting in lost revenue, customer dissatisfaction, and potential damage to their reputation. 

A comprehensive insurance policy with adequate coverage ensures a faster and smoother recovery process, minimising operational disruptions.

3. Impact on Company Valuation

Inadequate insurance coverage after a loss can negatively impact a company’s valuation. Investors and stakeholders may perceive the business as riskier, potentially leading to a decrease in market value. This, in turn, can affect the company’s ability to attract investments and secure favourable financing terms.

4. Legal and Regulatory Compliance

Meeting industry-specific insurance requirements is crucial to avoid legal and regulatory consequences. Non-compliance may subject businesses to fines, penalties, or legal action. Companies must stay informed about and adhere to insurance regulations to maintain a robust risk management strategy.

5. Rebuilding and Replacing Assets

Insufficient insurance coverage may hinder a company’s ability to fully rebuild or replace assets. This scenario can have long-term implications, affecting competitiveness and hindering recovery efforts after significant losses.

6. Meeting Contractual Obligations

Contracts with lenders or business partners often mandate specific insurance coverage for fixed assets. Failure to meet these contractual obligations can result in breach of contract issues, exposing companies to additional liabilities.

To enhance your business’s risk management strategy, it’s essential to regularly reassess the value of property and contents. Periodic reviews of insurance policies and declared values ensure that your business stays adequately protected against potential risks, contributing to overall operational resilience and long-term success. Speak to the team at Charterfields for a declared value health check to expose any areas of weakness in your policies and make sure you have adequate coverage for your business.