Keeping sums insured up to date

Aug 29
3 min read

Updated: 2 days ago

Introduction

A policy renews every year. The premium adjusts slightly, the paperwork is filed, and the sums insured are exactly the same figures somebody entered when the policy was first taken out six years ago.

In those six years the business has grown, equipment has been added, stock levels have risen and construction costs have moved considerably. The declared values are now well below reality, and because most policies settle proportionately, every claim from now on will be reduced by the same proportion — including small ones. The reduction is applied as a matter of policy arithmetic rather than as a judgement about the claim.

1. Keeping sums insured up to date protects the whole claim, not just large ones

Understand how the reduction works.

Where a policy applies average, a business insured for sixty per cent of its true value receives sixty per cent of any claim, including a modest one. The penalty is not confined to total losses, which is what most owners assume.

2. Know which figures need reviewing

A short and specific list.

Buildings at rebuilding cost, contents and equipment at replacement cost, stock at peak value, tenant's improvements, and the gross profit figure and indemnity period for business interruption. Each moves independently.

3. Use rebuilding cost for property, not market value

The most consequential distinction.

Rebuilding includes demolition, site clearance, professional fees and compliance with current building standards, and it frequently exceeds market value. Insuring at what the property would sell for is a substantial and common error.

4. Account for construction and equipment inflation

The change nobody notices.

Material and labour costs have moved considerably in recent years, which means a figure that was accurate three years ago is now low even if nothing about the business changed. This alone creates underinsurance passively.

5. Revalue after growth, not only at renewal

The trigger that matters most.

New equipment, a second site, higher stock levels or a significant new contract all change the figures immediately. Waiting until renewal leaves a gap during exactly the period the business is most active.

6. Get a professional valuation for property

Worth the cost for buildings.

Rebuilding cost assessments are specialist work and the figures are frequently very different from an owner's estimate. For anything other than a small property this is a sensible periodic expense.

7. Consider index linking and declaration conditions

Helpful and not sufficient.

Many policies index-link sums insured, which handles inflation but not growth. Some include provisions that relax the average condition within a margin, and knowing whether yours does changes how much headroom you need.

8. Keep an inventory that supports the figures

The evidence half.

A list of equipment with values and dates, stock figures through the year, and photographs. This is what allows a figure to be justified and what makes the claim itself far easier to substantiate.

9. Put the review in the calendar

Otherwise it does not happen.

An hour once a year, before renewal, checking each figure against current costs. This is one of the highest-return administrative tasks a small business has and it is almost universally skipped.

Ask your broker to explain how average applies to your specific policy, because the wording varies and some policies are considerably more forgiving than others. Knowing whether you have a margin before you need it is far better than discovering the position during a claim.

Conclusion

Review the figures annually, because underinsurance reduces every claim rather than only large ones.

Identify which sums need checking and understand that each moves independently, use rebuilding cost for property rather than market value, allow for construction and equipment inflation, revalue after growth rather than waiting for renewal, obtain a professional rebuilding assessment for property, understand whether index linking or any relaxation of average applies, keep an inventory that supports your figures, book the review in the calendar, and ask your broker how average works on your specific wording. For anything beyond a small property the figures are frequently very different from an owner's estimate.