Do not assume your indemnity insurance policy covers your industrial machinery and any customer’s assets in storage which may be under refurbishment. This is the main message from this article. You must check you have the maximum cover you will need for your business in the event of a fire, flood or other incident that damages your premises and the contents of your property.
Read the small print before signing up to any indemnity insurance policy.
Why does this matter? It matters because business continuity is central to the success of your business. You will have jobs booked into your systems and customers expecting you to provide a service but you may need industrial machinery, in the case of Charles Piton Ltd for example industrial dehumidifiers, to clean up after a flood.
The guiding principle with indemnity insurance is the same as insurance generally which is to return the insured party, in this case your business, to the position you held before the incident that led to the loss. An insurance company will not do more than this and you should not sign a policy that does less than this because business continuity is the only way to survive and thrive. Your customers need not know that you have had a fire or flood and must not be inconvenienced by it.
Indemnity insurance for businesses is not the same as home insurance and insurance companies do not guarantee to replace new industrial machinery for old.
If we take the example of industrial dehumidifiers, each item may cost £850 to buy new but your insurer may value them at £250 leaving you with a £600 shortfall each and you may own 300 of them. You can see that in this scenario, indemnity insurance that only pays the estimated value of the industrial machinery may not meet your business needs and may not be fit for purpose.
When you take out business insurance, there are three possible options:
- Pay out based on the current value of the industrial machinery which will take into account wear and tear, depreciation and will be lower if the equipment is old and no longer on the market.
- Insurers buy second-hand equipment for you if they can but if they can’t source second-hand items, they replace old items with brand new ones.
- Simple new for old like in home insurance policies – this is the most expensive option.
The first two insurance options are arranged on an indemnity basis. Do not expect new replacement assets with indemnity insurance. The third option is called reinstatement which does offer new for old and is now the most common type of insurance in the UK. Please note this is not automatic for commercial enterprises and you will have to pay a higher premium to secure new for old guarantees.
You need to assess how much your assets are worth before your sign up for indemnity insurance.
Don’t simply assume that the price you paid is an accurate value that insurers will accept. You need to think about the current market value of all industrial machinery, taking into account its age and condition. If your assets are no longer being produced and sold, depreciation will be greater according to your insurers.
You must take care not to over or underinsure your business and its assets. The Building Cost Information Service did research that suggested that the level of underinsurance in UK commercial property could be as high as 80%. Research by the Chartered Institute of Loss Adjusters (CILA) found that business interruption policies that protect business continuity after a major incident and insurance claim were underinsured by an average of 50%.
One way to ensure your indemnity insurance sums are accurate is to arrange for a qualified surveyor to provide regular professional valuations.
In the same way that you get your jewellery valued periodically, arrange a valuation of your industrial machinery and you won’t be caught out.
This may sound like an expensive solution but once a full valuation has been carried out if nothing has changed, a cheaper desktop reappraisal may keep your valuation up to date. Money invested in a valuation keeps your indemnity insurance policy and any claim valid and will ensure that you receive the right amount of compensation after a loss. It’s the best way to make sure you recover and maintain business continuity.
Valuers can help businesses identify their most important assets including buildings, industrial machinery, storage and contents. They will check the price paid for each item and add depreciation over time. They will also consider if the customer paid over or under market value for the asset.
Market value for assets including industrial machinery can change because of fluctuations in exchange rates that may be due to major political events like a recession or Brexit. Manufacturing is worldwide so exchange rate fluctuations can have a big impact on the value of your equipment.