Are your Sums Insured Up to Date?
For small and medium enterprises (SMEs), maintaining your sums insured accurately and keeping them up to date can mean the difference between bouncing back from adversity and facing unexpected financial loss. But what exactly do sums insured mean, why are they important, and how can businesses avoid the pitfalls of underinsurance? Read on for these answers and more.
What is a sum insured and why is it important?
A sum insured is the maximum amount your insurer will pay out in the event of a claim under your insurance policy. Whether it's property, equipment, or stock, the sum insured is the declared value of your insured items. This figure is critical because it determines your premium and, more importantly, the financial compensation you'll receive if you suffer a loss.
How to choose your sums insured and keep them up to date
Maintaining accurate sums insured is not a set-and-forget task. Rising costs, inflation, and changes in your business operations can quickly render your sums insured inadequate. For example, construction and material costs have been rising in Australia, significantly increasing rebuilding expenses; equipment and technology evolve, leading to fluctuating replacement costs; and business expansion or the acquisition of new assets may require adjustments to your coverage.
What you can do:
- Seek professional valuations: Engage professionals to assess the value of your assets and check your sums insured reflect true replacement costs.
- Engage an insurance broker: A broker can help you understand your coverage needs, calculate accurate sums insured, and ensure your policy suits your business.
- Account for inflation: Check if your policy includes indexation to adjust for inflation, particularly for long-term coverage.
- Conduct regular reviews: Review your insurance policies annually or whenever there are significant changes in your business.
What can happen if you're underinsured?
Underinsurance occurs when your sums insured are less than the actual cost of replacing or rebuilding your assets. This can have serious consequences for your business:
- Reduced Claim Payouts: Most insurance policies include a co-insurance or average clause. If you're underinsured, you'll only receive a proportion of your claim relative to the level of underinsurance (refer to definition below).
- Financial Hardship: The gap between your insurance payout and the actual cost of recovery could leave your business struggling to recover.
- Business Disruption: Delays in replacing assets or repairing damage can disrupt operations, affecting your revenue and customer relationships.
The co-insurance clause
The co-insurance clause is a standard feature in many Australian business insurance policies. It means that if your sums insured are below a certain percentage of the actual value, typically 80-90%, your claim will be reduced proportionally. For example, if your property is insured for only 70% of its true value, your payout will be reduced by the same ratio, even for partial claims. Your sums insured must meet or exceed the required threshold to avoid shortfalls in payouts.
How Coverforce can help
Our experienced brokers take the time to understand your unique needs and help to ensure your sums insured are accurate, so your business remains fully protected. From navigating complex policies to providing expert advice, we help you avoid underinsurance and stay prepared for the unexpected. Let Coverforce give you the confidence and peace of mind to focus on growth - contact us today to safeguard your business's future.
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