Brexit & Stockpiling: How to avoid underinsurance

7 September 2020

The state of play 

The UK officially left the European Union on the 31st January 2020, and entered into a ‘transition period’. The UK and the European Union have until December the 31st to agree a new relationship. 

There are two possible outcomes; A new trade deal is struck before the end of the year, or the UK leaves the European Union without a deal.

The continued uncertainty has forced many businesses to begin stockpiling goods in the event of a no deal Brexit, wary of the potential impact this could have on their supply chain. The government are now actively encouraging businesses to plan for every eventuality. Pharmaceutical companies have been told by the Department of Health and Social Care to stockpile 6 weeks of drugs as a priority.

Its important you consider how this could impact your insurance policies. 

Why are businesses stockpiling ahead of Brexit? 

UK businesses are accelerating their stockpiling efforts as the end of year Brexit deadline draws closer. Businesses are starting to run supply chain tests and fill their warehouses with essential goods and inventory to ensure they can manage in the worst-case scenario of high tariffs and hard borders. 

Businesses planning for Brexit;

  • Electrocomponents explained to the Financial Times they were building up the Brexit buffer again, which will see the business hold millions of pounds worth of stock in their warehouse.
  • Bentley have said they plan to increase warehouse space, so they have enough stock to last 10 days rather than 2.

What Impact does stockpiling have on my insurance?

Most importantly, stockpiling can cause major concerns with your insurance cover in the event of a claim. When stockpiling, it’s vital than you communicate with your broker to update your policy and increase your sums insured. Otherwise, your policy won’t be able to help cover your additional stock if you make a claim, leaving you with significant financial loss.

How you can avoid underinsurance in your business.

If you are unfortunate enough to have an insurance claim, insurers will automatically check that the amount you have insured your property for is adequate. If you have business interruption cover, they will check this too.

Your broker will be able to help you, but the sums insured are ultimately the decision of you, the policyholder.

We are going to look at what happens in a claim when the sum insured is less than it should be (the Reinstatement Value) – this is known as underinsurance. When underinsurance is discovered as part of a claim, insurers will apply a calculation that reduces the claims payment, this is known as “Average” and is a clause in most policy wordings.

Here’s an example where we have kept the maths simple:

Insured value: £ 250,000 
Correct Reinstatement value: £ 500,000
Underinsurance: 50%
Claim for storm damage: £ 100,000
Claim Payment (value of claim x underinsurance %): £ 50,000

In this example, a storm claim has occurred. As the sum insured for the building was 50% of its Reinstatement Value the claim payment is reduced by 50%, even though the claim amount is lower than the original sum insured.

Calculating the correct Reinstatement value is the duty of the policyholder and differs from the market value of the property concerned. As it sounds, it is the cost of reinstating all the property in the event of a loss, including:

-   Materials (including hard to find or rare materials.
-   Labour
-   Removal of debris (and the cost for disposal)
-   Professional Fees (architects, surveyors etc.)

In the event of a claim and it remains the duty of the policyholder to ensure the sums insured in the policy are accurate.

Speak to our team 

If you are stockpiling and concerned about underinsurance please contact our team.

Contact our Team 
 

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