Under Insurance aka Coinsurance or Average Clause
When obtaining insurance a Sum Insured is not always easy to determine. What was originally worth XX to build five years ago, may now be worth XX to rebuild. In the event of a claim, the insured may assume the insurer will pay up to the Sum Insured. Right? No, unfortunately this is a common misconception.
At the time of a claim, the insurer will bear no more than 80% of Total Insurable Value.
In the event of a partial loss, the following example explains how Underinsurance can affect the overall payout to the insured.
Total Insurable Value $200,000
80% of Total Insurable Value = $160,000
Sum Insured $144,000
If a $100,000 loss occurs, the insurer will pay ($144,000/$160,000) x $100,000 = $90,000
The Insurer would pay $90,000 (minus the Excess applicable to the policy)
How to avoid Underinsurance?
- Obtain expert advice by appointing a qualified Valuer to ensure an adequate Sum Insured.
- Review your cover each renewal and utilise Underinsurance Calculators offered by your insurer.
- Allow for Indexing to your Sum Insured on renewal. This can assist in the accommodation of inflation.
- Notify your Broker when modifying/renovating and existing building or purchasing a new one.