There are several factors you should consider when deciding on the amount of insurance to purchase. Unless your area of expertise deals specifically with risk management and/or claims, it’s easy to underestimate the amount an insurance claim could cost.
At best, under-insurance can result in you or your business needing to pay the deficit, but at worst some policies even penalise under-insurance by actually reducing the amount paid, meaning you could end up covered for even less than you paid for.
Tables of Contents
- How much should I insure my buildings for?
- How much should I insure business or home contents for?
- What is an Average clause?
- What is the Ogden Rate?
- How much Public Liability should I buy?
- How much Employers’ Liability should I buy?
- How much Professional Indemnity should I buy?
How much should I insure my buildings for?
You should how to calculate insurance level and price for building insurance as stated by qualified third party surveyors. Failing a qualified second opinion, you should consider the cost of not only rebuilding the property from scratch, but the potential cost of removing rubble, contaminated land, restoring damage to nearby buildings and/or the services of architects and engineers. Beware under-valuation of your building as in the event of a commercial building insurance claim insurers may then refer to the ’average’ clause in your documentation and effectively pay less than the full claim cost.
How much should I insure business or home contents for?
When you are calculating the total value of your contents (home or business), bear in mind that many policies provide you with new versions of your lost items. As such you should calculate the cost of buying those items new, even if you purchased them second hand. Err on the side of over-valuing your contents, as insurers often apply an ’average’ clause, which can cost you dearly if you under-insure.
Don’t forget the value of documents, jewellery, furniture, books, antiques and any other specialist equipment you may own when calculating your contents value, and remember that insurers often require you to declare individual items above a certain value when obtaining quotes, so make sure to ask them what those thresholds are.
What is an Average clause?
An ‘Average’ or ‘Full Value’ clause allows insurers to pay a lower amount on claims where contents or buildings have been under-insured. Typically the conditions will allow for insurers to pay under by whatever percentage you have under-insured your property:
- You have insured your building for £150,000 and the entire thing burns down. Insurers determine that the rebuild cost for the building is actually £200,000 meaning you were under-insured by 25%. Your claim payout is therefore also reduced by 25% from the amount insured, meaning you ultimately only receive £112,500. You lose £87,500.
- Your contents are insured for £80,000 however after a burglary where you lose £10,000, insurers determine that your contents insurance level should have been £100,000. You were under-insured by 20% and therefore you only receive £8,000 in payment for your losses.
What is the Ogden rate?
The Ogden rate is a multiplier used to calculate how much should be paid in settlement of personal injury claims. It’s important since in 2017 it was changed in a way which increased the amount insurers would need to pay for these claims. In 2019 it was changed again to slightly correct this, but the overall effect has been to make liability claims cost insurers more.
As an example, a claim which in 2015 may have cost insurers £5,000,000 could cost up to £8,000,000 today following the changes made to the rate. What this means to you is that wherever possible you should be looking for the higher cover level when considering liability policies. Typically the cost of doubling cover level is nowhere near a doubling in premium, so a small additional expense now has the possibility of saving your business from bankruptcy later.
How much Public Liability should I buy?
Levels of cover vary from £1 million all the way up to £10 million and even higher. If your client interactions are limited and you don’t sell any products, a level of £1 or £2 million is likely to cover someone’s injury from tripping over your bag, or having your coffee spilled on them. £5 million would make certain that even the unlikeliest of injuries are compensated properly. Try getting quotes for all three levels and you’ll see the price doesn’t rise all that much. If you run a business which involves any higher volume of client or public interaction then you should consider whether your activities could cause injuries to multiple people at once, or serious injury to one person. Remember this can be from a member of the public wandering into somewhere they shouldn’t be, or from displays, scaffolds or other business equipment falling over or being tripped over. If these apply to you then consider at least £5 million Public Liability, preferably £10 million.
Lastly, if you are a construction company, event host, or any other company exposed to large crowds of people or working with dangerous machinery, consider a minimum cover level of £10 million. It’s possible to go higher, although this may require what’s known as ‘Excess Layer’ coverage where a second insurer provides additional cover. Speak with your insurer or broker about cover levels if in doubt.
How much Employers’ Liability should I buy?
There’s not a great deal of choice when it comes to Employers’ Liability levels; a £5 million Employers’ Liability cover limit is the legal minimum, although most insurers will only offer £10 million as their standard level now. In some rare cases more can be purchased although this is usually only catered to when you have contracts which require you to have a higher level of Employers’ Liability.
How much Professional Indemnity should I buy?
You should purchase enough professional indemnity cover to pay for the cost of redoing your work and undoing any damage which results from the work you have done. If you are doing the same work for multiple clients, imagine what the cost might be if you make a similar mistake for each and every client, say, in the form of incorrect documentation or calculations.
Typically, professionals operating in construction, manufacturing or engineering may be more at risk from ‘knock on’ losses, where their single mistake has severe repercussions, but in all cases consider the cost of fixing a mistake and the cost of the court case, damage to client reputation, rectification and restoration costs of putting that mistake right.
A good rule of thumb is to consider the highest amount you could possibly expect to be claimed against for, and then to purchase the cover level above it. Typically you will pay less per £100k of cover as the total cover limit goes higher, so it will not double the premium to purchase double the cover level.