With fire season upon us, it is important to make sure your insurance cover is up to date and that you are not underinsured.
Miscalculating the cost to replace buildings and equipment when taking out and renewing insurance policies is one of the more common mistakes businesses make when it comes to insurance. Neglecting to regularly update the value of insured items or getting it wrong when evaluating the cost of replacing buildings and equipment, can be a costly mistake when it comes to making a claim.
Building costs have increased dramatically in recent years and another common mistake people make is to underestimate what it will cost to rebuild.
Insurance brokers witnessed this with the Christmas Day bushfires at Wye River and Separation Creek on the Great Ocean Road in Victoria. A large number of homes that were destroyed were found to be insured for approximately half of what it was going to cost to rebuild.
Another common issue is the use of depreciated values for equipment on the balance sheet. Insurers need to know “replacement value” rather than depreciated value. A replacement value is how much it would cost you to go out and buy the equipment the same year, make and model, at today’s current prices.
One way to avoid the problem of not correctly valuing property, business contents, and equipment for insurance purposes, is to make sure your assets are accurately valued by a reputable valuer on a regular basis. It’s also important to update the value of the items covered by your insurance policy on an annual basis.
If you are underinsured when making a claim and your insurance only pays out part of the cost of replacing the asset, you will often have to meet the additional cost from cash flow, which can be a huge burden on businesses and individuals.
It is fair to say that most people don’t underestimate or overestimate asset values deliberately. It’s often a genuine mistake, but if you are underinsured it’s a mistake that can be incredibly costly.
In addition to basic insurance for property, it is also helpful to consider the following:
1. Business interruption insurance; what is the financial impact of having to close the business for a period of time?
2. Proof of ownership; important documents should be stored off site and IT systems should be backed up externally. Proof of ownership can be difficult to prove following an event, but an important part of the insurance claim process.
3. Property Maintenance; regular maintenance is critical to avoid or minimise potential damage, particularly during fire season.
If you would like to review your business insurance this summer, please contact your Insurance Adviser.