Underinsurance is a problem that affects many businesses, especially in inflationary contexts where prices of goods and assets can change quickly.
What is infra insurance?
Infra insurance occurs when the insured value of a company’s assets is lower than its actual replacement value. This entails a serious financial risk in the event of a claim, so it is crucial to have adequate insurance covering the real value of the assets.
Protection of corporate assets: Property damage insurance
The real estate assets of companies are protected by property damage insurance. In large companies, coverage is provided through a All Risk of Material Damage insurance, whose philosophy is that everything is covered except exclusions.
In smaller companies, the insurance is covered by a multi-risk insurance combining material damage and civil liability. In this case, only coverage named in policy is included.
How to calculate the appropriate value of insured goods
In both cases, for both All Risk of Material Damage insurance and Multirisk insurance, it is necessary to have a quantification of the capital:
- Continent: the physical structure of the factory or office
- Contents: furniture, machinery and trousseau inside the factory or office
- Fixed stocks: raw materials, in-process products, finished goods and factory goods.
- Floating stocks: part of the stock of stocks which fluctuates throughout the year according to the seasonality of each company.
The value of the continent and content capital is the replacement value of these assets. In no case should it be the original purchase value or the book value after depreciation.
The value to be included in the policy is the present value of the assets to be replaced when a claim occurs, so that the insurance company pays for the replacement of the assets claimed.
It is important that the insured value should not be lower than the actual replacement value in any case so that the insurance company does not consider that there is a sub-insurance.
Why is infra insurance a problem?
The infra insurance can be problematic in case of a claim, as the insurance company will apply the proportional rule to calculate compensation. This means that if you insure a good for less than the value it corresponds to, the insurer will compensate a proportional part of the damage.
Why is it important to review the insured capital in an inflationary context?
In a high inflation environment, it is essential to review the insured capital because the widespread increase in prices may directly affect the actual replacement value of the insured assets.
Example of infra insurance
Imagine you have a factory whose real value is €20M but you have insured it for €10M (half of its real value). If you have a claim for damages of €50,000, the insurance company will not compensate you for the full amount of €50,000, but for the proportionate part, that is to say, half: €25,000.
How to avoid the infra insurance?
To avoid the underinsurance, it is important:
- Correctly value the insured goods: Ensure that the value of the property reflects its actual market or replacement price.
- Review policy regularly: Values may change over time, either through appreciation or depreciation, so it is advisable to update the policy from time to time.
- Consult with a professional: An insurance broker or expert can help you calculate the right value for your assets.
Infra insurance can result in significant economic losses in the event of a claim, so it is essential to be properly advised to be well protected.
Contact our team of experts to receive professional advice and a proposal with the right coverage for your company.
