Dangers of scaling back on your business insurance amid rising costs

With the cost of ‘doing business’ rising for many companies, it can be tempting to cut-back on aspects or limit your insurance policy to save money but it’s a risky business, writes Catriona Brolly, Account Executive in AbbeyAutoline.

“With the rising cost of living, material and labour costs, many businesses are looking at where they can save money. While this is totally understandable, it’s important to know the risks before you make any decisions on limiting your commercial insurance policies.

Regardless of what your business is, the piece of advice I’d offer to all, is to ensure your sum insured cover is adequate. It is critical that businesses have the correct sums insured so that they are fully protected in the event of loss or damage.

Sum insured can refer to Contents, Buildings or Stock – with some commercial policies offering these in a combined policy if relevant to your business.

Looking first at Buildings Sum Insured – the ‘Sum Insured’ must represent the full rebuilding cost of the property – not the market value.

This might include: the cost of materials; professional fees (surveyor or architect); labour costs; site clearance or removal of debris; fixtures and fittings; walls/gates and fences; small out-buildings; extensions; yards and car parks; paved areas; security cameras; fixed fuel tanks; wires and piping.

When we talk about Contents Sum insured, we are referring here to the total value of machinery, plant, and equipment as well as furniture, shelving and racking, computers, office equipment, furniture and all other contents within the insured property.

In terms of Stock Sums insured, the amount insured should represent the value of all stock and materials in trade belonging to the insured, or what they are responsible for.

When setting a Stock Sums insured value, you should consider the maximum value at any point of the year, factoring in seasonal or peak trading periods when you may be holding more stock

I’ve known of instances were there have been insured perils, such as a fire, and the Sum Insured value stated in the policy was not sufficient to replace the damaged building and as a result the business suffered significantly.

Over the years, I’ve had occasions where businesses ask about opting out of ‘index linking’ in an attempt to save money.

Indexation (or to Index Link a policy) gives you the option to increase the amount of cover you have on an annual basis, to help combat the effects of inflation. The premium will also increase each year, to reflect the increase in policy benefit.

With the fluctuating price of many building materials – for example the steep rise in steel costs this year – index linking ensures you have adequate cover against financial loss from an insured peril such as fire.

I work closely with businesses in the motor trade – dealers as well as mechanics and bodyshops – and one of the topics that comes up from time to time is the appropriate duration of ‘business interruption’. Business Interruption insurance is an aspect of a commercial policy which covers you for loss of income during periods when you cannot carry out business as usual due to an unexpected event.

Business interruption insurance aims to put your business back in the same trading position it was in before the event occurred. This is an optional addition to some commercial policies and sometimes clients are tempted to take a ‘minimum period’ of e.g., 12 months, hoping it will reduce a premium.

Depending on the nature of the business, 12 months might be short sighted. If for example, a bodyshop was damaged in a fire – you’d have to factor in site clearance, architect, sourcing materials, build time and it’s highly unlikely you’d be up and running again in a new building within 12 months. In a case like this, I would advise that a duration of 24 months would be a more appropriate timescale for a policy.

At the end of the day, we know that insurance is a ‘have to’ not a ‘want to’ purchase, and the decision about the level of cover will ultimately be elected by the business owner, subject to legal requirements.

That being said, it’s important to be as upfront and honest with your insurer about your value of Sums Insured, and to know and understand all the aspects of cover included in your policy, such as Business Interruption or Index Linking.

The advisor is there to guide you and will have lots of shared knowledge they can offer. It’s important to spend time talking though the level of protection you want, and what your business needs, to ensure you have an adequate financial safety net,” Catriona concludes.

If you are looking for further information or advice on Business Insurance please contact the specialist Commercial Team at AbbeyAutoline, 08000 66 55 44 or visit https://www.abbeyautoline.co.uk/business-insurance

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