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

Adjusted Loss = (Declared / Value) x Loss

For example, you insure your building for $500,000 and the true value of the risk is $800,000. If you had a storm where the repair bill was $200,000, your policy would respond as follows:

Adjusted Loss = ($500,000 / $800,000) x $200,000 = $125,000 Therefore for the $200,000 repair bill – the underinsured loss would result in a payout of only $125,000 which would leave you $75,000 out of pocket.

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.