For many leisure organisations, their buildings are community hubs; safe and welcoming spaces providing vital services. However, when it comes to protecting these buildings, sports and recreation centres are among those most commonly demonstrating inadequate insurance cover.
Underinsurance can pose a threat to organisations of any size or sector. However, according to recent datai, the most likely properties to be underinsured are sports and recreation centres. In this article, we explore underinsurance, how it occurs, its implications, and what you need to know to protect your organisation. Here’s an article from our business partners Gallagher to explain more.
Underinsurance occurs when a policyholder has inadequate insurance cover for their needs. In the event of a claim, this could mean a claim amount exceeding the maximum limit that can be settled by the insurance company. This could result in a shortfall for the policyholder and, potentially, financial loss. Common areas of underinsurance for organisations are property, stock and contents, plant and equipment, and business interruption.
There are several reasons a policyholder may be underinsured, including:
Underinsurance poses several critical risks to businesses, including:
Whilst underinsurance can affect all types of properties for several reasons, recent research suggests that there are a number of property types most likely to be underinsured. The top five include:
The Average Clause is a lesser-known condition of building insurance when a policyholder has under-valued the rebuild cost and made an insurance claim. The clause states that the policyholder must bear a proportion of any loss where assets were insured for less than their full replacement value. In this scenario, the insurer can reduce the settlement by the same percentage if the asset is underinsured.
The clause can be relevant to various types of property insurance, which may encompass coverage for buildings, contents, plants, machinery and business interruption. The specific terms and conditions outlined in your insurance policy will determine the applicability of the Average Clause.
For example, if your property insurance coverage falls short of the total reinstatement cost and you need to file a claim, the payout may not fully meet your needs, regardless of the claim’s size. This is because the percentage you are underinsured by can be deducted from your payout under the Average Clause in the policy.
A Leisure Centre has a current sum insured of £7.2 million. A disaster strikes and flood damages most of the premises, but not all of it, and loss adjusters determine that the actual rebuilding cost is £9 million, indicating a 20% underinsurance.
The loss is calculated at £5 million, but when the insurer applies the Average Clause, the claim payment is reduced by the amount of underinsurance (20%). As a result, the policyholder faces a shortfall of £1 million in covering the full repair costs. A Reinstatement Cost Assessment would have helped identify the underinsurance on which the policyholder could have acted.
An RCA is a process used to determine the estimated cost of rebuilding or repairing a property to its original condition in the event of damage or destruction. It is typically conducted by a professional surveyor or valuer who evaluates various factors such as the size, construction type, materials used and specific features of the property. The assessment considers the current market prices of labour, materials, and other associated costs to provide an accurate estimate of the reinstatement cost. This assessment helps insurance companies determine the appropriate coverage limits for property insurance policies to ensure that policyholders are adequately protected in the event of a loss.
Our team can help to safeguard your organisation against unforeseen losses by reviewing your insurance to find any cover gaps and creating a policy that reflects your needs. We can also provide you with a quote for a rebuild valuation from a RICS (Royal Institute of Chartered Surveyors) qualified surveyor, ensuring your property is accurately assessed for insurance purposes.
To find out more, please get in touch with Gallagher’s Charities SME and Mid-Market team.
Martin Taylor
SME and Mid-Market Director
Charity and Healthcare Division, Gallagher
07395 881906
Michael Cashmore
Account Executive
Charity and Healthcare Division, Gallagher
07708 296640
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/ or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
Arthur J. Gallagher Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: Spectrum Building, 55 Blythswood Street, Glasgow, G2 7AT.
Registered in Scotland. Company Number: SC108909. FP1136-2024 Exp.30.07.2025.
