The rising inflation we’re experiencing now is affecting insurance in a number of ways.
Materials commonly used to replace damaged properties, such as building items and even labour, are in short supply, driving up replacement costs.
In these times, it’s important for small businesses to make sure the sum insured for their assets reflects their current replacement value so that if their property is damaged, the settlement may cover the costs. If the sum insured is not accurate, this may impact the settlement amount when a claim is made.
Insuring for the true replacement cost is crucial
In business insurance (not in home insurance) there is generally a coinsurance clause that states the requirement to insure for the replacement cost of the building at the time the policy is taken out.
This is relevant in the current inflationary environment because the cost of materials and building costs have increased significantly.
If the insured amount is $1 million and it’s going to cost $2 million to replace, there will be $1 million out of pocket.
It’s extremely important that the sum insured reflects the true replacement cost at the time the policy is taken out, regardless of what the owner believes it to be.
In the event of a claim where the business does not insure for full replacement cost, the insurer can reduce the amount of the payout even if there is not a total loss.
The way in which this works is complex and depends on the wording of the particular policy.
The following is an example from a wording which is widely used in the market.
- Sum Insured on the building: $1,000,000.
- Actual cost of replacement of the building: $2,000,000.
- Cost of repairs: $200,000.
- Amount payable under the policy = ($2,000,000 x 80%) = $1,600,000.
- $1,000,000/$1,600,000 = 62.5%.
- $200,000 x 62.5% = $125,000
- Amount payable = $125,000.
In this example if the building burns down, the insurer only has to pay the sum insured. If the insured amount is $1 million and it’s going to cost $2 million to replace, there will be $1 million out of pocket.
Yearly review of sum insured recommended
Underinsurance can be a serious problem in Australia, especially when people don’t regularly review the sum insured.
Small businesses should aim to review the value of their assets at least once a year.
The increases are so significant at the moment that it should be twice a year, but at least once is recommended. Every time a business renews the policy, they should be working out the replacement cost of the asset as well.
If your property or asset has an unusual feature, it’s best to use either a quantity surveyor or a valuer to get a more accurate calculation and this should be done at every renewal, particularly in the current environment of rising inflation.
Calculations should factor in a time lag
Another point small businesses should consider is that if their building or another asset is damaged or destroyed, it may take a while to replace, as some materials are not currently accessible.
Jobs that previously took six months can now take 12 months because the materials aren’t available.
Also, if a significant amount of work is required, it will probably take a while to get council approval. In the time required to get either approval or for the materials to be sourced, costs could have risen again. Therefore all these matters need to go in the mix when working out how much cover is required.
This is why having a conversation with your Whitbread Insurance broker is so important.
Important notice: This article provides information rather than financial product or other advice. The content of this article, including any information contained in it, has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the information, taking these matters into account, before you act on any information. In particular, you should review the product disclosure statement for any product that the information relates to it before acquiring the product.
Whitbread are here to support you with important insurance and risk guidance in this challenging time. To request an Insurance quote for your business, please get in touch with one of our specialists:
This article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 Licence Number: 229092 trading as Whitbread Insurance Brokers for further information or refer to our website.
