Stock Sums Insured: Why the Peak Matters More Than the Average
Buildings underinsurance gets most of the attention, and our article on the distinction between buildings declared value and sum insured goes into full detail on the risks in that area. Stock deserves the same attention and rarely gets it, because stock has a habit buildings do not: it moves. The sum insured that was right in February can be badly wrong in November, and the consequences arrive at exactly the moment the warehouse is fullest.
How stock sums insured go wrong
A stock sum insured is usually set once a year, at renewal, and the temptation is to set it either at the average holding, because the average feels representative and keeps the premium down, or at whatever the stock inventory happens to show on the day of the renewal review. The problem is that fires and floods do not schedule themselves for an average week, and the holding on renewal day says little about the holding at the peak. Take a wholesaler whose stock averages £400,000 across the year but rises to £700,000 ahead of its peak season. Insured at £400,000, the business is underinsured by three sevenths during precisely the weeks when a loss would be largest. The average clause then applies: the insurer reduces any claim in the same proportion as the shortfall, and not only on a total loss. A £70,000 water damage claim in peak season would be reduced to £40,000, before the excess.
The right figure is the realistic peak, not the average. Where that makes the premium feel disproportionate for a business whose peak is short, there are better answers than quietly insuring low, and they are the subject of the rest of this article.
Basis of settlement: cost price, not selling price
Stock is normally insured at what it would cost you to replace it: cost price, plus the costs of getting it to your warehouse, such as freight and duty. It is not insured at the price you would have sold it for. The margin between the two is not lost, but it is not the stock section’s job: the profit you would have earned on destroyed stock is business interruption territory, which is one reason the two sections need to be set consistently. A business that insures stock at selling price is paying premium on value the section will never pay out; a business that forgets freight and duty on imported stock is underinsured before the average clause is even considered.
Seasonal uplifts and declaration conditions
Insurers know stock moves, and policies have two standard mechanisms for it. The first is a seasonal uplift: an automatic increase in the stock sum insured, commonly during defined periods around recognised peaks. The mechanism is useful, but only if the defined months match your peak. An uplift written around Christmas trading does nothing for a business whose season peaks at Easter or in late summer, and we see uplift clauses that have never been checked against the actual trading calendar of the business they sit in.
The second is a declaration basis. Instead of one fixed figure, the business declares its actual stock values periodically, and the premium is adjusted against the declarations at the end of the year. For businesses with genuinely volatile stock this is often the honest answer: cover follows the real exposure, and the business stops paying all year for a peak it holds for six weeks. Declaration conditions bring obligations, the declarations must actually be made, on time and accurately, so they suit businesses whose stock records are good.
The stock that is not in the warehouse
The final blind spot is location. A stock sum insured attaches to the premises named in the schedule. Stock at a third-party warehouse, at a processor’s or subcontractor’s premises, in a bonded store or in transit between any of them needs its own extensions, with their own limits, and those limits need the same peak-versus-average scrutiny as the main figure. For an importer, the goods on the water can be a substantial share of the year’s exposure, and where responsibility for insuring them sits depends on the shipping terms agreed with the supplier, which is a conversation worth having before the goods move rather than after.
If your stock figure was set from last year’s figure, which was set from the year before’s, the review is straightforward: your own records already show what you actually held, month by month. We do this as part of any commercial combined review, and it is one of the quickest genuine improvements available in a commercial programme. Our commercial combined insurance page explains the wider cover, or speak to the commercial team.
