What happens if I under-insure
If you are under-insured, you might be in for an unpleasant surprise if you ever 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 will not receive a complete pay out.
Business policies have one of the highest incidences of under-insurance and it is estimated that over 70% of policies have some form of under insurance.
To show the impact of under-insurance, we include the following example based on a policy with 80% co-insurance:
Adjusted Loss = (Declared / Value) x Loss
If 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 uninsured loss would result in a $75,000 lower payout.
Common 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
- Underestimating the costs associated with removing debris (even $100,000 doesn't go far where there are contamination issues like asbestos roofing or damaged stock with special disposal requirements)
- Keeping sums insured up to date year after year
- Having no business interruption insurance
- Setting inadequate indemnity periods for business interruption insurance and not having additional increased cost of working cover
Check your building sum insured using this simple calculator (click here).