Underinsurance may seem to be just an excuse for insurers to sell more coverage, but this is not the case. There is an important reason why all businesses consider the question of underinsurance seriously as it can significantly affect a claims payment following a loss. An example of a business being underinsured would be to understate the actual amount of stock on the premises or turnover. It is particularly important that a growing business ensures that it has the appropriate level of cover as it expands, and similarly if a business is changing, checking that they don’t have too much cover. In the event of underinsurance, there are two routes that an insurer may choose to take: 1. CHARGE AN ADDITIONAL PREMIUM The premium is recalculated based on the actual amount of stock or turnover and the necessary additional premium is charged. The loss would then be paid in full. 2. APPLY ‘THE ‘CONDITION OF AVERAGE’ TO THE CLAIM SETTLEMENT Alternatively, an insurer may reduce the amount of the claim payment in direct proportion to the amount of underinsurance. This is known as applying ‘average’. For example, if a business was underinsured by 50% and suffered a loss of €40,000, the application of average would reduce the claim payment to €20,000. This could have big implications for a business trying to get fully operational again following a loss and can be an expensive mistake to make. Therefore, it is important to accurately assess the right sums insured you need for your property, contents, stock and turnover. Equally, if you are experiencing rapid growth in your business, the estimates you provided at the start of your policy might quickly become inadequate so keep them under regular review and report any changes to your broker or insurer. Finally, for business interruption cover, it is worth spending time to assess the time it would take for your business to fully recover in the event of a significant loss. Businesses frequently underestimate this when selecting their indemnity period. 12 months is often inadequate and 18 or 24 months would be safer in many cases.