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Soapbox with Jane Shelmerdine, The insurance valuation that could ease company stress
Yorkshire companies are facing increased costs to rebuild their premises or replace key equipment after a major incident.
For many, their insurance will be insufficient to cover rising costs. A re-evaluation of assets might not take long, but it could save a company a great deal of financial worry.
Over the past 12 months, construction costs in the UK have been fuelled by global demand for commodities such as steel and petroleum. This is on top of major construction projects such as the London Olympics and the extensive call on resources from last year's flooding. This has resulted in increased prices due to a shortage of labour and materials.
In addition, legislative developments, such as the Landfill Tax, are adding significantly to the cost of environmental issues, such as debris removal. If dangerous materials like asbestos are found in the damaged building, then, again, costs will rise with the need to employ specialist firms.
Many companies think that their insurance will cover this. But if a company's insurance is based on a lower value, it may not receive the full value of a claim. This is the case even with a partial loss. If the overall sum insured is inadequate, insurers can apply an "average". This means they will reduce the claim settlement figure in proportion to the level of under-reported insurance value.
Common errors in calculating insurance values include:
Using the wrong indices to value assets.
Failure to include items such as the cost of car parks, access roads, perimeter walls and landscaping.
No allowance made for listed status, known asbestos or lead times for replacement of specialist machinery.
Using accounting, rather than insurance, definitions.
Failure to update sums insured to reflect changes in the business, such as a new acquisition, development of a new product or general growth during the year.
Underestimating the need to include professional fees or other items like debris removal.
Inadequate provision made for a loss at a major supplier.
In order to avoid the consequences of potential under-insurance, companies should have a professional valuation of buildings and contents carried out at three to five years.
Professional valuers should take account of building materials, increases in labour costs, professional fees, debris removal and plant-hire costs. They will normally advise on the additional provisions necessary to reflect price increases during the rebuild period.
Once a professional valuation has been carried out, buildings, plant and equipment sums insured can be adjusted annually for inflation by applying one of several indices used by valuers and contractors.
However, these indices rely on the base figure to which they are applied being accurate and up to date. Also, average building costs in most indices cannot accurately reflect variations in different types of structures or detailed geographical variations. Therefore, companies may need to use their knowledge of the local labour market and specialist conditions as part of the calculation process.
There are also various cover options available in respect of material damage insurance, which can help to protect against future inflation costs and the impact on sums insured.
Of course, business interruption is often the most damaging side-effect of an incident. So it is important to use the insurance, rather than accounting, definition when setting the correct gross profit sum to be insured.
If in doubt about the financial ramifications of business interruption, companies should conduct a review, which will help to establish the sum insured.
However, all companies need to have a good strategy in place to manage risk and a regularly updated business continuity plan. By managing insurance and risk effectively, companies can help to ease the pain – not to mention the cost – of a major incident.
Jane Shelmerdine is the Leeds sales and service leader at Marsh, insurance broker and risk adviser.
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Saturday 11 February 2012
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