Inflation hits all businesses
Large price increases around the world affect the value of assets, while supply shortages and delays extend the rebuild time due to laborious delivery of raw materials, thereby increasing the potential cost in the event of an operational downtime. The impact of inflation varies by industry, geography and ultimately by specific company. A range of factors affect businesses.
Consider the lingering effects of the COVID-19 pandemic, the Russia-Ukraine crisis, the sharp rise in oil and gas prices in Europe and natural disasters. This increases asset values and contributes to:
- Disruptions in buyer and supplier risk
- Increase in commodity prices
- Increasing labor costs and limiting availability
- Higher production costs
- Increase in cost of finished product
- Exchange rate instability.
As the cost and time to rebuild and repair after a loss increases, insurers are increasingly strict about keeping insured sums adequate. Insurers expect policyholders to provide reliable insured values and to do so using careful methods, such as a firm appraisal by a licensed appraiser.
Possible consequences of underinsurance
Underinsurance usually occurs when the current values of assets, such as buildings, business equipment, inventory and the goods, change and where the insured values are not adjusted in accordance with these increases. This can have significant consequences, such as claims limits and inadequate insured limits
If the value of assets increases, but the insured values and/or limits are not increased appropriately, you as an organization are at risk of not receiving full indemnification in the event of a loss.
Property and business interruption – application of underinsurance clauses
If the values of tangible interests, such as buildings, business equipment/inventory and goods and/or business losses have increased, but you have not yet updated the updated values then you are at risk of underinsurance. The vast majority of insurers have underinsurance clauses. These clauses allow insurers to proportionally reduce a claim.
In the case of underinsurance, the insurer will proportionally reduce the amount it is obligated to pay based on the difference between the insured value and the actual value of the lost assets.
Business damages and an appropriate payout period
Business interruption coverage includes a maximum payout period. This is the maximum period over which insurers will reimburse business losses after an insured event. It is usually set at 12, 18, 24 or 36 months from the date of damage.
The result of failure to timely rebuild and/or repair damaged assets prior to the expiration of the insured benefit period for business interruption may result in uninsured additional expenses and loss of gross profits. A 12-month benefit period may no longer be sufficient in the current situation. It may happen that reconstruction and/or repair has not yet begun while the benefit period has (almost) expired. Consider the inability to obtain construction materials in a timely manner and limited labor availability.
It is therefore very important to review the insured benefit period in light of the changed circumstances and, where necessary, request a longer benefit period.
