When hospitality operators think about insurance, they often focus on ensuring they have cover in place. However, a growing concern across the sector is not a lack of insurance, but underinsurance.
Many businesses are discovering that while they have insurance policies, the sums insured no longer reflect the true cost of rebuilding premises or replacing contents and equipment. This can leave owners facing a significant financial shortfall at the worst possible time.
What is Underinsurance? Underinsurance occurs when the value declared to insurers is lower than the actual cost of rebuilding a property or replacing assets following a loss. For hospitality businesses, this can affect: • Hotels and guesthouses • Pubs and bars • Restaurants and cafés • Function and wedding venues • Nightclubs and entertainment venues The issue often arises because estimates have not been updated for several years or because business owners rely on market values rather than rebuild values. Why Hospitality Businesses Are Particularly Vulnerable
The hospitality sector presents unique insurance challenges. Buildings often contain specialist features such as: • Commercial kitchens • Extraction systems • Cold rooms and refrigeration equipment • Bespoke bars and fixtures • Function suites • Historic or listed building features These elements can significantly increase rebuilding and replacement costs. In the event of a fire, flood or significant storm damage, the cost of reinstating a hospitality premises can be substantially higher than many operators expect.
The Impact of the Average Clause One of the most misunderstood aspects of insurance is the application of the Average Clause. If a business is underinsured by 25%, insurers may reduce claim payments by a similar proportion, even for partial losses. For example: A restaurant should be insured for £1 million but is only insured for £750,000. A fire causes £200,000 worth of damage. Because the property was only insured for 75% of its true value, the insurer may only pay 75% of the claim, resulting in a settlement of £150,000.
The business would need to fund the remaining £50,000 itself. This often comes as an unwelcome surprise to business owners who believed they were fully protected. Rising Rebuild Costs Continue to Create Challenges Construction costs, labour shortages and material price increases have all contributed to higher rebuilding expenses in recent years. Even businesses that reviewed their insurance arrangements just a few years ago may now find that their declared values no longer reflect current costs.
Particularly at risk are:
•Older town-centre pubs
• Period hotels
• Coastal hospitality venues
• Listed buildings
• Premises with significant recent refurbishments
Business Interruption Cover Matters Too Underinsurance is not limited to buildings. Business Interruption cover is designed to protect revenue and profits while a business recovers following an insured loss. However, if indemnity periods are too short or declared gross profit figures are inaccurate, operators may find that cover runs out before they are fully trading again. For many hospitality businesses, particularly those reliant on seasonal trading, weddings or events, recovery can take considerably longer than anticipated. Steps Hospitality Operators Should Take To reduce the risk of underinsurance, Hospitality Ulster members should consider: 1.
Review Building Sums Insured Ensure the figure reflects the true cost of rebuilding, including professional fees, debris removal and compliance with current building regulations. 2. Reassess Contents and Equipment Values Commercial kitchens, IT systems, furniture and specialist equipment should be reviewed regularly. 3. Check Business Interruption Cover Consider whether the declared figures and indemnity period remain appropriate for current trading conditions. 4. Account for Refurbishments
Any extension, renovation or investment in new equipment should be reflected in insurance values. 5. Obtain Professional Valuations A professional reinstatement valuation can provide confidence that declared values are accurate and defensible. A Timely Reminder No hospitality business expects to suffer a major fire, flood or other catastrophic event.
However, when losses do occur, insurance is often one of the most important financial safeguards available. The real question is not whether cover exists, but whether it is sufficient. Taking the time to review insurance arrangements now could prevent a significant financial shock later and help ensure that, should the unexpected happen, your business has the support it needs to recover and reopen successfully.
If you would like to review your Insurance, at Everywhen we offer an annual insurance review that we carry out with our clients to ensure that figures are kept updated and relevant.