The impact of underinsurance on business

New Zealand is a land of uncertainties. Earthquakes, floods and other weather-related events are proof that no one is immune to the forces of nature. As we all know, these can majorly impact your business; but what about the internal incidents or accidents that force businesses to stop working at full capacity?

Self-assessment leads to underinsurance

All businesses need property insurance to cover their buildings, plant, equipment and contents, as well as adequate business interruption cover. Insurance is designed to restore your business to the position it was in before an insured loss, and to reinstate your business on a like-for-like basis without financial penalty. It is all too easy to assume your business is fully covered for both material damage and business interruption, but unless the business assets have been correctly valued, it could well be underinsured. This is commonly due to:

1.  The method used not being best practice. This can lead to errors in the initial assessment of value. For example, underestimating or omitting to account for the costs required to rebuild such as debris removal, site improvements not associated to a building and currency fluctuations, as well as lead times for approval, planning, the rebuild period and policy life.

2.  Not revising values annually, or failing to account for the rise in associated costs impacting the true cost of reinstatement.

The risks of getting it wrong

Unfortunately, the risks in getting it wrong can be substantial, and not just for the business. Ultimately, it is the directors of the business who bear the responsibility for declaring insured values, and they can be penalised for misrepresentation in the event of a claim. Most businesses need to get up and running again quickly after a loss; but if there is no solid basis for the declared values, ensuing investigations may lead to protracted claims processes and delayed settlements.

If the property has been underinsured and the insurance company does decide to pay, even if it pays out the full amount insured, it might not cover the full loss. The business is then responsible for finding the shortfall and making good the repair.

The benefits of getting it right

Ensuring that you and your business are fully covered is much easier than you think. The most important thing is to make sure your business is properly assessed by qualified valuers using a robust valuation process.

A proper valuation process removes the potential risk to directors and ensures that there will be no gap to cover in the event of a claim. It’s also important to have an up-to-date asset register, which will allow you to respond to a loss with the minimum impact to your business.

In fact, one of the advantages of the valuation process is that it forces many businesses to implement internal processes, such as asset registers, that have long been on the to-do list. The benefits of having a valuation carried out are significant, both to you and your business, and include:

  • Reducing the risk of paying the consequences of underinsurance in the event of a claim;

  • Avoiding paying excessive premiums due to over-insurance;

  • More negotiating power when it comes to renewals;

  • Better claims processes, without disputes around the insured values;

  • Reducing interruption to business operations;

  • Establishing lead times that can feed into business interruption calculations;

  • Implementing internal processes, such as asset registers;

  • Compliance for risk mitigation.

What should you do next?

Contact a professional valuation service and book in a comprehensive valuation of your business assets.
Aon’s Insurance Valuation Programme is undertaken by qualified professional valuers who provide a three-year service: an on-site valuation in year one, followed by an on-desk review in each of the following two years. Businesses using premium funding facilities can add the cost of the Insurance Valuation Programme to the facility.

Don’t wait to find out you are underinsured. Contact your broker today.


This website contains general information only and does not take into account your individual needs or financial situation. It is important to note that limits, excesses, terms and conditions and exclusions apply to the products and services outlined on this website. Please refer to the relevant policy documents for details of cover, the provision of which is subject to the insurer’s underwriting criteria that apply at the time. Please contact us if you have any questions.