Insurance

5. How Much Cover?

Take time to think clearly about the amount of cover you need. Overinsurance is a constant financial drain on your resources, while underinsurance can be fatal to your business.

5.1 There are several principles to bear in mind when deciding how much cover to buy.

• Buildings should be insured for their full rebuilding cost (not forgetting professional fees and the cost of site clearance) and not their market value. If your buildings are leased, check that the landlord has this type of cover in place.
• Insure stock for its replacement cost price, without any addition for profit.
• Plant and machinery should normally be insured on a 'replacement as new' basis.

5.2 If you pay for too little cover, the insurance company is entitled to reduce any claim by the percentage of underinsurance.

• For example, suppose you insure your property, which has a full rebuilding cost of £75,000, for only £50,000. The insurer can reduce any claim you make by the same proportion - ie if you claimed for a genuine £3,000-worth of damage, you would only receive £2,000.

5.3 Most insurance policies require the insured to pay an 'excess' or 'deductible', covering the first part of any loss.

• Make sure the excess on your policy is an appropriate amount.
• You can often negotiate a big reduction in premiums by agreeing to a higher excess.

5.4 Some policies allow you to pay a lower annual premium for your cover if you build up a no-claims bonus over several years.

• You may want to avoid making claims just above the excess, if they would lead to increased premiums in subsequent years.