The pitfalls of underinsurance and how to avoid them
Underinsurance is unfortunately common in Australia, making it difficult for those policyholders who are underinsured to resume their pre-loss position.
Underinsurance refers to having insufficient insurance values (relating to property, contents and loss of income policies) to cover the entire value of the loss in the event of a claim. This situation needs to be avoided at all costs, as it can substantially reduce your insurance payout in the event of a claim, and the flow on effect can be highly detrimental to your long-term financial position.
- Not accounting for upgrades to your home or business.
- Not accounting for all of your assets.
- Increased building costs.
- Supplementary costs such as cost of demolition, removal of debris, architect, and surveyor services.
- Rising insurance premiums.
Most insurance policies will contain a co-insurance clause, this clause ensures policyholders insure their property to an appropriate value and that the insurer receives a fair premium for the risk. It allows for an error/adjustment by the Insured up to a pre-determined figure, this is located in your Policy Wording. An example is:
In the event of damage to property insured hereunder at any Situation caused by any peril hereby insured against, the Insurer(s) shall be liable for no greater proportion of such damage than the amount of the Insured’s declaration of value of such property insured, at the Situation where the damage occurred, on the day of the commencement of the Period of Insurance bears to the sum representing eighty-five per cent (85%) of the actual value of property insured at such Situation on the day of commencement of the Period of Insurance but not exceeding the Limit of Liability expressed in the Schedule.
Many people believe that if they underinsure the only penalty that they are exposed to is if the claim exceeds the sum insured, this is incorrect.
The following calculation is designed to highlight the penalty that will be imposed should the sum insured or declared value be under the true value at risk at the start date of the policy:
| Client advised value | $600,000 |
| Actual value | $1,000,000 |
| Underinsurance value (85%) | $850,000 |
| Loss amount | $425,000 |
| Claim payment due to underinsurance | $300,000 |
| Shortfall | $125,000 |
Tips to avoid underinsurance
What are the most important coverages to you? E.g. Are you worried about flood? Do you really require Gross Profit coverage as a professional services firm? What are the key factors that could impact your business? All of these concerns should be discussed with your broker.
Review all Sums Insured in your policy regularly, this can be done during the policy period and you do not need to wait until renewal. Consider if you are comfortable with the excess level. Can this be paid in the event of a claim? Check if there have been any changes to your policy terms and conditions.
Utilise Sum Insured calculators and be sure to provide accurate values for replacement costs.
An experienced broker understands the ins and outs of the policies in question and the impacts of underinsurance. Your broker should be on hand to assist in providing the correct limits of liability and guide you through the renewal process.
With cost-of-living pressures escalating and higher premium rates, increasing your sums insured can be a tough decision. However, it is one all policyholders should carefully consider to ensure you are correctly and fully protected in your time of need. After all, will you remember the price paid for the policy when an insurable loss happens, or the financial impacts of a claim not paid in full?
Our team of specialist insurance brokers are here to assist. For a review of your property insurance needs please contact us via the form below.
