The meaning of value
The value of a business can mean different things to different people; to the owner, it could mean the income it generates; to an investor, its price on the open market; but to an insurer, it is the cost to reinstate the business if it was completely destroyed by a disaster such as a fire – that means the cost to rebuild any premises from scratch and replace all physical contents with new items.
The hospitality sector, in which impressive interiors are a must to stay ahead of the competition, is particularly at risk of undervaluing its assets.
You know that luxury finishing touches like silver tableware and Egyptian cotton sheets make lasting impressions on your clientele, but do you know how much they bump up the total cost of your contents? Or the carefully sourced vintage furniture pieces, how much would they cost to replace?
Undervaluing your commercial assets is likely to mean that you are also under-insured and this can have serious consequences for a business in the event of a claim.
The real cost of under-insuring
If you insured your buildings and contents for £600,000 but the true cost of completely rebuilding and replacing all items would actually be £1,000,000, you would be 40 per cent underinsured and could find any claim, even if only a partial loss or minor damage, subject to the ‘average’ clause.
This means that if the business is damaged and the cost of repairs is £100,000 the claim will be reduced by 40 per cent. The policyholder will receive £60,000 and be £40,000 out of pocket.
Unless the business has substantial reserves this shortfall could not only lead to a less desirable interior; having to replace designer furniture with high street items and forgoing expensive pictures and luxury decorations. But it could also mean you are unable to fully rebuild or restore your premises to its former glory, particularly if it benefited from period details. Worst case scenario, if your building is listed and you can’t fund the rebuild specification stipulated by the governing body, you may not be able to rebuild at all.
Taken together with the fact the business is likely to be out of commission for an extended period, the consequent loss of income, the application of the ‘average’ clause after a fire or flood, for example, could spell disaster for any bar, hotel or restaurant.
Getting it right
Although it is very common to see an under-insured business, it is also very easy to avoid if business owners follow some simple steps:
- Do not quote the purchase price or market value of a building to your insurer – you must obtain the ‘rebuild value’.
- Use a professional buildings surveyor, particularly if you have a non standard building such as a thatch, stone or listed property as these types of buildings often cost more and take longer to rebuild due to the specialist materials and skills required.
- Spend some time to conduct an inventory of all contents, include everything from furniture and electrical items down to cutlery and kitchen wear. Doing this systematically, room by room, not only helps to accurately value your contents but can also speed up a claim as you will have records of all the items that need to be replaced.
- Include all fixtures and fittings in your inventory. The cost of replacing floorings, curtains and light fittings can add up to more than you expect.
- Take pictures and obtain valuations of high value items such as artwork, furniture or antiques as proof of ownership, condition and value.
- Keep documents off site – if you do suffer a fire or flood you want to know these are safe
- New for old -always state how much it will cost to re-purchase items not what you paid or their ‘second hand value’.
- Stock and money kept on sight should be covered under a separate cover extension.
- Repeat every 3 to 5 years as commodity and market prices can fluctuate, or after any renovation work, as this could affect your valuations.
- If in doubt ask your insurer to come out and conduct an assessment of your business and any discrepancy in cover.