Most Insurance policies are subject to a term called “average”, which means that if you underinsure and make a claim you would not receive the full value of your claim. The claim settlement is reduced by the same percentage of the underinsurance, as the insurer deems it that you have not paid the correct level of premium for the cover you actually needed. Therefore, they will only pay a claim in the proportion to the premium that you have paid.
Insurance premiums are worked out against the sum insured that you choose. For example, you may insure £10K of contents for £100 of premium but £20K of contents would cost £200. If you had £20K of contents and chose a sum insured of £10K then you have only insured 50% of what you actually own, so in the event of a claim the insurer only has to pay 50% of a claim settlement.
If you choose a lower sum insured, you’ re not actually insuring everything you own and not paying enough premium for an insurer to put you back in the position you were in before the loss occurred. This rule doesn’t just apply to total losses – the insurer can reduce any claim by applying average to the claim due to underinsurance. In the same example above, if you had £20K of contents but only insured £10K and then suffered a break in and had £2K of stock and equipment stolen then the most you can hope to receive in the settlement is £1,000, as you’d only get 50% due to paying half the premium you should have.
This stresses the importance of checking your level of cover is sufficient. Not only do you need to insure your stock and contents, but you should also consider tenants improvements. These are the items in your salon that are your responsibility even if you would not take them with you if you moved, such as flooring and decoration.
If you rent a premises from a landlord and there was a fire that destroyed the building, the landlord’s insurance would pay for the rebuild of the building but you would need to consider if you would be responsible for putting the shell back to a salon. If there’s a flood, who is responsible for the flooring? Does your lease say you’re responsible for flooring, kitchens, bathrooms, backwashes and partition walls? If so, these would need to be insured too.
We recently had a claim where a salon owner insured her contents for £5K then suffered a minor flood at the premises. The true value of the contents at risk turned out to be closer to £36K, so she was barely 14% adequately insured. Despite the value of the items for which she was claiming totalling £3K, her settlement was £416.40 once average/underinsurance was applied. You can see the importance of having the correct level of insurance.
This article was written by Rosie Barrington and originally featured here
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