Everything you need to know about Under-insurance
The holidays usually mean gifts and treats. But have you ever stopped to think how the festive season could affect your
home and contents insurance?
In our latest blog, the #InsuranceInsider team shares all you need to know about the potential perils of under-insurance…
read on to find out how to avoid costly claims shortfalls.
ALL THAT GLITTERS
You should be aware that any new gifts and gadgets, or existing possessions that you might have upgraded, may not be covered
in your household contents policy or may not be insured for their full replacement value.
More mundane, day to day items such as clothing, crockery and linen are also often overlooked.
What’s more, you probably won’t find out about these items being under-insured until you need to claim for them –
and it’s too late to update your insurer.
WHAT IS UNDER-INSURANCE?
The South African Insurance Association explains under-insurance as:
“property that is insured for less than it would cost to replace the property”.
If you understate an insured item’s value, you end up paying incorrect premiums. If you then need to submit a claim for an under-insured item,
the pay-out is calculated in proportion to the actual sum insured and the actual value at risk at the time of loss or damage, and your payment
will be adjusted accordingly.
SAVE A LITTLE NOW, SPEND A LOT LATER
It’s tempting to underinsure your items to reduce your insurance premiums. What are the chances you’ll need to claim, right?
But any savings you might make in the short term will most likely pale in insignificance compared to the shortfall in
potential claim pay-outs.
“Severe flooding, wildfires, drought and tornados have become frequent occurrences across South Africa. Most of all,
these uncontrollable events highlight the folly in assuming that worst case scenarios are simply too unlikely to happen.
Major assets such as cars and homes are often not properly insured which is a real concern. If this is the case, you may
discover that you are only partially covered because of what insurers call the ‘average formula’ at claims stage.”
Mandy Barrett – Aon South Africa
If you submit a claim while under-insured, the claim will be “subject to average”, and a calculation will be applied to work out the insured sum,
using this formula:
Sum insured / value at risk x loss = settlement.
Your property is insured for R10,000. The cost to replace it would be R15,000. Your property is damaged and cost of repair is R7,500. The amount
paid out would be:
R10,000 / R15,000 x R7,500 = R5,000
This would leave you R2,500 out of pocket, and illustrates why it’s important to update the amounts you are insured for regularly to avoid being
HOW TO AVOID UNDER-INSURING YOUR CONTENTS
Household contents are usually insured as a whole. The best way to check your contents are sufficiently covered is to compile an inventory of
household items, giving each item an up-to-date replacement value to work out a total replacement value – what you would need to spend to if
you had to replace all of these items today.
While making this list, it’s a good idea to include serial numbers and photograph your items to complete the inventory. If you buy new items like
expensive furniture or electronics, remember to update your inventory and let your insurer know, so the insured value of your policy can be updated.
UNDER-INSURED PROPERTY PITFALLS
So your contents are covered – what about your building insurance? This pays out if your home’s actual structure is damaged in the event of a fire, flood,
lightning or other unforeseen disaster, so it’s crucial that you’re covered for the correct amount.
The sum insured on the property should be increased in line with current building prices, and should be checked each year for any significant differences
between the actual replacement cost of the building, and its current market value.
Carrying out renovation projects can add to your property’s value, and homeowners should have remodelled properties revalued to determine whether they
are sufficiently insured.
Most insurers share risk-modelling expertise and insights with brokers so they can help clients manage the potential risks and
advise them appropriately.
Get in touch with your broker today if you have any questions about your insurance cover.