In this article, an insurance specialist for the hospitality sector at insurer, NFU Mutual, discusses the importance of valuing your assets accurately and the common pitfalls that many hoteliers fall into.
The carved oriental table, positioned for maximum effect in the hallway, and early Georgian walnut bureau in the library were chosen with infinite care and cost a small fortune to boot so it must be galling to have them rated ‘average’.
One simple mistake, which is all it takes, and owners of fashionable boutique hotels and style restaurants could well find themselves with this unfortunate label.
Once it has been applied the label is likely to stick. Complaining is unlikely to sway opinion and no part of the business is safe from the slight. Not the peacock blue dining room with its burnished chandelier and art deco candle holders. Not even the colour washed walls that offer such a perfect faux rustic background to display the David Hockney sketches that were a bargain even at the stupendous prices paid for them at auction.
Clearly, if it is not the eclectic harmony of the recovered Tudor fireplaces, antique Chinese silk rug and Japanese vases that is to blame and your taste is incontrovertibly impeccable then it must be down to something else. The answer to what this is lies in the provenance of the rating.
Applied by customers or professional style-arbiters in the media ‘average’ is damning enough. But harsh though it is the implied ironically understated disapproval is likely to be less harmful in business owners’ eyes than the harsher reality of being deserted by trend-conscious customers.
Applied by the hotel or restaurant’s insurers it is exactly the prospect of the unfavourable business consequences that come with the label that means it has to be taken seriously.
Here, it refers to a clause in commercial insurance contracts. It is applied when the hotel or restaurant is damaged by fire or flood, for example, your expensive bureau and table are scorched and to cap it all the business is underinsured.
Erring on the side of caution, you were conservative in your estimate of the amount of insurance you needed. Now you find yourself faced with a gap between the insured and actual value of the property because the full cost of repairing or replacing those valuable items is not covered.
There is little comeback for the hotelier if in such a case the ‘average’ clause is applied. The line taken by disputes resolution body the Financial Ombudsman Service, for example, is clear. It says: “We will usually decide it is reasonable for the insurer to apply the average clause if the consumer was asked to confirm the total replacement/rebuild cost, given clear guidance on how to calculate those figures, and clearly told about the consequences of providing incorrect figures.”
The position is exactly the same for hoteliers and restaurateurs in the same position. What it boils down to is the insurer will compensate them for only a proportion of the claim. As the policyholder they would be considered insurer for the amount of the underinsurance. In practice this means the cost of repairing or replacing items such as the Georgian bureau would not be fully covered. The business owner would have to find the shortfall and foot his share of any repair bills.
Fortunately, the application of ‘average’ to valuable items is easily avoided by taking a few simple measures. Darren Seward, NFU Mutual’s hospitality specialist, said: “As a company we stress the importance of carrying out a proper valuation as an essential part of the process of insuring valuable item such as artwork, antiques and even expensive interiors.
“We are as anxious as our clients to see claims settled to their satisfaction. A valuation limits the scope for dispute and restricts the possibility of ‘average’ coming into play.”
Unless the hotelier has substantial reserves a significant shortfall in the settlement could leave him unable to replace with like-for-like the expensive pictures, furniture, antique hand carved staircase or historical hammerbeam roof that have suffered flood or fire damage.
With the company likely to be out of business for an extended period, the consequent loss of income, and every possibility that rebuild costs are not covered, the application of ‘average’ after a fire or flood, for example, could be critical.
Seward stresses the importance of keeping proper records to support valuations and maintaining these securely at an off-site location. “We recommend that valuable items and property should be photographed and prints kept as proof of their condition and the value of your goods,” he says.
“NFU Mutual encourages valuations because we want customers to be satisfied. We don’t want or like to see average brought into play because it means something has gone seriously wrong. It should not be a factor if an accurate valuation is carried out and it is unlikely to be if records of your valuable items are kept and maintained.
“If your business is exceptional why allow it to be affected by something no better than average.”