Under Insurance

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