18 September 2023
Smaller construction firms at risk of underinsurance

According to recent research from insurance premium finance company, Premium Credit, the construction sector borrows more than any other industry to fund insurance premiums. In fact, 51% of construction SMEs relied on some form of credit to afford insurance premiums in 2022, borrowing £1,130 on average. However, some 13% of those who relied on credit borrowed £3,000 or more. Taken together, construction industry borrowing accounted for 12% of all net advances from Premium Credit in 2022.

Given the high-risk nature of construction work and its rather unenviable reputation as the UK’s most dangerous industry, comprehensive insurance is absolutely vital to ensure businesses are financially protected against whatever unfortunate events might come their way.

Rising cost of borrowing

Alarmingly, the Premium Credit report also revealed that 25% of SMEs reduced their cover across a range of insurance lines in 2022, with vehicle, property and product liability cover the most frequently reduced. Of those who reduced cover, just under a third (32%) cancelled at least one policy.

Borrowing money for insurance premiums makes sense for a lot of small businesses, enabling them to pay their premiums in instalments rather than as a lump sum. However, rising interest rates have greatly increased the cost of borrowing, whilst rampant inflation has caused the cost of living and doing business to soar, with the rising cost of building materials impacting the construction industry in particular. Whilst reducing or cancelling cover might feel like the only option for struggling SMEs, however, it is not the answer and leaves them even more financially exposed.

Education is key

It is vital that the client understands that a lower level of insurance may result in them not being fully covered at the point of claim, resulting in potential delays, financial difficulties and even the risk of insolvency.

Insurance professionals have a vital role to play in ensuring that all the businesses they work with, and especially smaller construction businesses which are less likely to have significant cash reserves, take out not the cheapest insurance policy, but the one that provides them with the cover they need.

We can inform and educate clients by:

  • Educating them about underinsurance and the potential financial repercussions for their business.
  • Helping them understand the impact of inflation on building reinstatement values, the cost of replacing stolen or damaged materials, the cost of labour, etc.
  • Ensuring they factor in new risks brought about by recent trends and events, for example the rising incidence of extreme weather events, building materials shortages, supply chain disruption and falling demand for homes due to high mortgage rates.
  • Ensuring they understand that their policy must cover them not just at the beginning of their contract, but also for its duration, so that they are not underinsured in the event of a claim near the end of the policy term.
  • Where a policy contains it, informing clients about the average clause. Insurers may use an average clause to reduce a client’s payout on a claim by the same proportion as they are underinsured. For example, if a client is only insured to 72% of the value they should be insured, the insurer might use the average clause to pay only 72% of their claim.

It is up to us to explain to the client the level of cover offered by a given product and how this compares to other offerings on the market. Only by providing this education, and by explaining the risks of underinsurance, can we help construction clients make better informed decisions about the insurance solution that will be most suitable for them.

Combined insurance cover especially for smaller contractors

Speaking of suitable insurance, one of our newer products is tailored entirely to the needs of smaller construction firms who are turning over less than £5 million per year, with a minimum premium of £1,000. 

Brought to you in partnership with NIG, Smaller Contractors Combined provides comprehensive cover for Employers Liability (£10 million) and Public/Products Liability (£5 million). Clients can also take out optional additional cover for Contractors All Risks and Excess of Loss Public Liability, which can be quoted separately.

Targeting a wide list of smaller construction contractors including builders, carpenters, cleaners, bricklayers and plasterers, the product also features NIG’s Risk Assist health and safety tool, £250,000 financial loss cover, legal expenses (including contract disputes) and the ability to quote for depths of three metres without referral.

To find out more about our Smaller Contractors Combined facility, please click here or get in touch with your Dedicated Underwriter.