The importance of having adequate sums insured for your not-for-profit organisation
01/17/2023
The current economic conditions present huge challenges for the not-for-profit sector, with funding and budget management being harder than ever. It is particularly important, during times of heavy inflation, that you ensure that your organisation is adequately covered.
This article provides information about how you can be confident that your organisation has the right level of cover, particularly for any buildings and contents.
Considering the right ‘sum insured’ value for your property and contents
When you arrange insurance, you need to specify the ‘sum insured’. A buildings sum insured is not the market value, but the amount it would cost to reinstate the building following a total loss (e.g. if it was destroyed by fire). It is important that, in addition to materials and labour, the reinstatement value includes costs such as demolition, site clearance, planning and professional fees.
For contents, you need to provide an estimate of the cost to replace your items, given current levels of inflation. Take a look at our video below that explains this in more detail:
What happens if you aren’t adequately insured?
If the sum insured is not adequate to cover the cost of reinstating your property, your organisation will be ‘underinsured’. This may have serious consequences because, should you need to make a claim, you may not be reimbursed in full under the ‘Condition of Average’. This hypothetical case study is a good illustration;
A village hall committee took out insurance several years ago, with a sum insured of £500,000. The hall was completely destroyed by fire and the committee claimed under their buildings insurance to reinstate the building.
The total project cost, including debris removal, the professional fees and repairs to the surrounding car park etc, was estimated at £1,000,000.
This meant that the village hall was underinsured by 50%. The ‘Condition of Average’ was applied, the insurer made a cash settlement of £500,000 as a contribution towards the reconstruction. The committee were left with a deficit of £500,000, and the hall was out of action for 3 years whilst funds were raised.
The impact of inflation
With inflation levels reaching a 40-year high in 2022, it is important that sums insured are reviewed, and that they adequately reflect the increased cost of materials. To account for the effect of inflation, many insurers apply Index Linking. This means that your sum insured will be increased in line with inflation at renewal, and your premium will be adjusted to reflect this.
When you receive your renewal from your insurer, it is important to check that your sum insured reflects the amount of cover you think you need.
Steps you can take to make sure you’ve got the right level of cover
Whilst insurers can apply index linking to increase sum insured in line with inflation, we recommend that your organisation also takes the following steps to ensure cover is adequate:
- Keep an asset register to list all of your property and the value of each item
- Annually check your declared values are accurate
- Use a professional surveyor to provide an up-to-date valuation every 3-5 years
- Check the definition of ‘buildings’ and ‘contents’ in your policy wording: you may find that ‘buildings’ includes gates, fencing, walls, car parks and much more.
If you’re in doubt about whether your cover is adequate, we recommend you speak to your insurer.
