Covered up

Jackie Hyde advises ways that day nursery owners can check if their business has adequate cover against loss.

It may surprise you to be told that a large percentage of day nurseries in this country aren’t adequately protected by their existing insurance arrangements. I have more than 10 years of experience of working with the day nursery industry, and know that not only were many nursery businesses founded over 10 years ago but that some have not reviewed their insurance cover since deciding upon the levels of adequate cover all those years ago.

Ultimately, not only is it the responsibility of the individual nursery to decide on the initial sums insured but also to ensure that they remain appropriate over time. Although nursery owners should expect support and guidance from both their insurer and broker in understanding how they should calculate the correct figures, in reality this does not always happen.

Such “under-insurance” can have a devastating affect on a nursery business particularly if a claim results in the setting having to close for any period of time.

I hope the following tips will help you understand some of the main issues you need to consider when reviewing the adequacy of your cover:

Building insurance

Your specified sum insured should be reflective of what it would cost to rebuild the property and must not be mistaken with market value – that is, what you would sell it for. The reinstatement figure needs to include the cost of clearing the site in the case of demolition and any architect fees incurred in rebuilding the property. Sources of help in establishing the correct figure include your mortgage provider, previous valuations of the property (which should include a rebuild figure), or alternatively your broker or insurer.

Be aware that most commercial property insurance excludes damage resulting from subsidence, heave or landslip. Climate change attributed to global warming has contributed to warmer summers in recent years, which in turn have resulted in an increased number of subsidence claims. Is your nursery building protected against this potentially expensive risk?

Contents insurance

The total contents sum insured must be adequate to replace all of your contents on a new for old basis at the time of the loss. Even if you have been fortunate in being able to furnish your nursery with discounted or some second-hand equipment you cannot guarantee the availability of such offers at the time of a loss. Accordingly, you need to insure such items for their full retail price.

I would recommend to nursery owners that they prepare a content inventory as this will help you to establish an accurate costing on a room-by-room basis. The inventory can then be reviewed on a periodic basis, perhaps with the help of your broker. Remember to include carpets, curtains, furniture, toys, stock, and office equipment – and don’t forget to include what is behind cupboards, particularly in the kitchen.

Laptop computers

Do staff in your day nursery use laptop computers? If so, have the laptops been specified on your policy to ensure that cover is provided away from the nursery?

Many people do not realise that their nursery contents policy will only usually insure property within the boundary of the nursery, which is of course inadequate for a laptop computer. If you do not specify such cover, the laptop will be uninsured should it be taken home or to a business meeting.

People can be mistaken into thinking that their laptop would be insured under their household insurance in such circumstances. However, many domestic insurance policies
include a standard exclusion relating to business equipment, which the laptop would be deemed to be if it had been purchased by the nursery.

It is more than likely that you will be able to extend your existing policy at a marginal extra cost. So make sure that you check your current cover today.

Loss of income

This section of your insurance policy is designed to protect all of the hard work you have invested in building your business over the years to what it is today. If your day nursery is closed for even a short period of time, parents may have no alternative but to place their child in another nursery. When considering the amount of cover needed, it is important to keep in mind any potential growth in the business together with any intended increase in fees over the coming year.

Not all insurance policies provide loss of Income cover automatically, so check that you have cover in place. If you do, how do you know if the sum insured is adequate? As a basic guide to calculating your sum insured, use the following formula:

Number of registered children x Cost per child x Number of weeks the nursery is open x Percentage of expected capacity for the forthcoming year = Total amount to be insured for

For example, 80 places x £120 x 51 weeks x 80 per cent full = £391,680

This calculation will give you an idea on your prospective annual income for the coming year. You will then need to give consideration to the indemnity period – the length of time your insurers will continue to pay a loss of income claim following an insured event.

The insurance standard limit is 12 months which in our experience is unlikely to be long enough for day nursery businesses. For example, a fire or severe water damage loss could result in your business being closed for, say, nine months. During this time it is likely that some or all of the children who attended your nursery will have been placed in alternative care.

Could you replace these children in the remaining three months covered by a 12-month indemnity period? If not, then you need to consider extending the indemnity period to 18 months, while larger nurseries
should even consider 24 months.

The consequence of under insurance…

All insurance policies are, as they say, “subject to average”. Put simply, if your sum insured is half of what it should be, any subsequent claim settlement will be reduced by half.

Of course, we all hope that we will never suffer a loss. But experience tells us that they do happen. Therefore it is very important that you take the time and trouble to review your cover carefully to ensure that any claim will run smoothly, you will receive full reimbursement and, perhaps most importantly, the business will suffer minimal disruption.

If it has been a while since your cover was last reviewed, then don’t leave it any longer. Check your sums insured now to ensure that they accurately reflect your business as it trades today, as you never know what is
round the corner!