Flood damage: Commercial Policyholders Beware!

An estimated 1 in 6 homes in England and some 185,000 business are thought to be at risk from flooding and it is estimated that up to 70% of businesses may be underinsured. The recent adverse weather conditions and flash flooding across the country should serve as a clear reminder to property owners, landlords and commercial tenants that they need to have adequate cover in order to avoid the potential for underinsurance.

Policyholders should check their current insurance policy terms and conditions ensuring that the following risks are adequately covered:

• Perils
  Check that the policy actually covers the risk of storm and flood damage.
• All Locations
  Consider whether the policy terms take into account the interdependencies of sites and functions by ensuring that losses are recoverable across the whole business and not just the specific premises suffering the damage.
• Buildings
  The business premises should be insured for the full rebuilding cost (including professional fees and the cost of site clearance) and not just the market value.
• Contents
  Stock should be covered for its cost price and provision should be made for seasonal stock fluctuations
• Business Interruption
  Ensure that there is appropriate cover to compensate for the shortfall in gross profit together with payment of any increased working costs.
  • In general terms business interruption cover based on gross revenue is more appropriate for service industries whereas businesses with variable costs will benefit from cover based on gross profit.
  • It is important to consider whether the definition of gross profit (as understood by the policyholder) matches the policy definition.
  • Ensure that the sum insured in respect of gross profit adequately reflects any upward trend in profitability
• Maximum Indemnity Period
  Ensure that careful consideration is given to the length of the indemnity period. The business needs to recover to the position it would have been expected to have been in had the insured incident not occurred. Factors to be taken into account when deciding a maximum indemnity period should include the length of time it will take to demolish and clear the site, obtain planning permission, rebuild the premises, replace machinery and stock and win back customers.
• Declaration Linked Policy
  Using a declaration-linked policy where premiums are adjusted at the end of the policy term according to declarations of actual gross profit is the simplest way to avoid the risks of underinsurance.
• Tenants
  Tenants of commercial premises should be satisfied that the landlord has taken out insurance sufficient to cover the building against flood damage.
• Landlords
  Most leases provide for rent to be suspended while a building is being repaired and in such circumstances landlords should be satisfied that the insurance adequately covers loss of rent.

If you represent a policyholder (or are a policyholder) with a problem insurance claim or would simply like more information about our insurance litigation services, please contact Nicola Maher, Senior Associate by emailing nicola.maher@edwincoe.com

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