JOE VELLA NEWS
business insurance > under-insurance
What happens if I under-insure?
If you are under-insured, you might be in for an unpleasant surprise if and when you need to make a claim. Even in situations of partial loss, it is likely that you will be deemed to be carrying a percentage of risk and you may not receive a complete pay out.
Business policies have one of the highest incidences of under-insurance. It is estimated that over 70% of policies have some form of under-insurance.
To show you the impact under-insurance can have, we have included the following example based on a policy with an 80% co-insurance clause:
Adjusted Loss = (Declared / Value) x Loss
Say you own a building with a replacement value of $1,000,000.
Let’s say you only insure it for $500,000.
A storm hits and there is a repair bill for $200,000, this is how your policy will respond:
True Sum Insured = $1,000,000
Insurer’s Allowance for Margins of Error (Usually 80%) = $200,000
Therefore the “correct” sum insured = $800,000
Your selected sum insured = $500,000
Which means $500,000 / $800,000, insurers portion of loss = 62.5%
Your portion of loss = 37.5%
Therefore for the $200,000 repair bill – you would pay out of your own pocket $75,000
Common Business under-insurance traps
- Underestimating the reinstatement costs of buildings (not allowing for the increasing costs of rebuilding and the additional costs of new buildings, heritage issues, etc).
- Not allowing for architectural and engineering fees when setting the building sum to insure (such advice may be required if the building needs to be rebuilt following a loss).
- Underestimating the replacement cost of plant and machinery, especially if sourced from overseas.
- Underestimating the costs associated with removing debris.
- Not reviewing sums insured and ensuring that they are up to date year after year.
- Having no business interruption insurance.
- Setting inadequate indemnity periods for business interruption insurance and not having additional increased costs of working cover.
