Chances are that you have heard people talking about under-insurance, seen an article or two in the news papers (usually after a large catastrophe) or your broker has mentioned it to you. So what is it and why should you care?
According to the Australian Securities and Investments Commission (ASIC), based on a report in September 2005, approximately 70% of Australian homes are underinsured. It also affects retail, commercial and industrial properties. So what is it? The dictionary of Insurance Terms defines under-insurance as:
- Failure to maintain adequate coverage for a specific loss or damage.
- Failure to meet a coinsurance requirement.
Why should you care? You should care because if you don’t adequately insure your property, assets, contents and livelihood for what they are worth, chances are that any premium you may have saved by “cutting corners” will end up costing you more in the long run. For example, if you suffer a total loss or even a partial loss it is likely that you will be deemed to be carrying a percentage of risk and you will not receive a complete pay out. To show the impact of under-insurance, below is an example based on a policy with an 80% co-insurance:
Adjusted Loss = (Declared / Value) x Loss
If you insured for $500,000 and the value at risk was $1,000,000 with a loss of $200,000, the claim would be adjusted as follows.
Adjusted Loss = ($500,000 / $800,000) x $200,000
Adjusted Loss = $125,000 – In this example, the underinsured loss would result in a $75,000 lower payout.
How does under-insurance occur? There are many reasons why so many people are underinsured:
- Accumulation – Our possessions grow over time. Have you thought about the cost of replacing your entire wardrobe? How about all of the new tools & equipment you purchase every year to keep up with advancing technology?
- Upgrading – We replace our belongings with new ones over the years.
- 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 insured (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.
- Having no business interruption insurance.
- Setting inadequate indemnity periods for business interruption insurance and not having additional increased costs of working cover.
- Underestimating the replacement cost of expensive electrical equipment.
- Not reviewing sums insured and ensuring that they are up to date year after year.
So what can you do to prevent it? Here are five things to consider^:
- Understand your policy. Is your policy for a fixed sum-insured, a sum-insured plus margin for increased costs, or a total replacement policy? Is your policy right for you?
- Each year, before you renew your policy, review the replacement value of your property, contents, business interruption, etc and adjust your cover accordingly.
- Walk through each room of your property and make a list of your contents and their replacement value. Adjust your cover accordingly and take careful note of policy terms concerning high value items and exclusions.
- Check rebuilding costs for your property, to do this you can use web calculators offered by many insurers, or you can obtain advice from a local builder.
- If you have renovated or improved your property since your policy was taken out, ensure that you check your insurance to ensure that the value of the improvements will be included.
^ The material contained in this article is designed to provide general information only and is not intended to provide personal or professional advice. Readers should not act on the basis of this material alone without taking appropriate professional advice relating to their particular circumstances. Five things to consider has been adapted from “Consumer Tips, Avoiding Underinsurance. June 2010” from Insurance Council of Australia.
We hope that this helps to give you some insight into the subject of under-insurance. Should you still have questions or want to discuss your policy, give us a call on (07) 4040 4444 or 1800 937 111.