Without even being aware of it, some people (or businesses) may be exposing themselves to high levels of risk due to possible underinsurance and the application of the condition of average by insurers.
What is under insurance? Under insurance is where your sum insured (maximum amount that can be claimed in the event of a loss) is less than the replacement / reinstatement cost of the property or of specified items. In the event of a loss, insurers generally ask the loss adjusters to comment on the total (or specified item) value at risk and should this be more than the sum insured, the proportion by which it exceeds the sum insured would be borne by yourselves.
This means that whilst your insurance claims payment will assist you in recovering from your loss, you may have to partially fund this reinstatement. Depending on the quantum of the loss, this could possibly place you in a position where you cannot replace what has been lost. This could be the cost of rebuilding the structure or, for contents, stock or personal property, the cost of replacing old with new. The adequacy of the business interruption cover is equally important so as not to impair recovery of the business following a major incident such as a fire or flood.
Whilst it is rare that there is total destruction of all assets, under insurance can also affect partial losses e.g. should the actual replacement value of the total buildings be R10 million and the sum insured is say, R8 million, a claim for partial damage of R1 million would result in a claims payment of R800 000.00 i.e. you would effectively be your own insurer for R200 000.00, being insured for only 80% of the loss.
By way of example: a recently handled fire claim, where the total sum insured for buildings was R740 000.00 however the reinstatement / replacement value was in the region of R1 650 000.00. The buildings were only insured for 45% of their replacement / reinstatement value and therefore the condition of average applied and the insured was settled 45% of the claimed amount and was considered their own insurer for the uninsured portion of 55%.
Some tips to make sure that you are not underinsured:
• With regards buildings, the sum insured should make provision for the cost of rebuilding all the structures on the property (as though they were completely destroyed) including the cost of demolition, removal of the debris, cost of plans, professional fees and importantly VAT. This amount should allow for any inflation occurring over the course of the insurance year and replacement time from the end of the insurance period and also take into account any escalation in the costs of material and other construction costs.
• Ensure your sums insured are adequate to cover all items that are to be insured eg: boreholes, paving, electrical (underground) cables, solar panels, paved roads and pathways and wooden walkways etc.
• Rethink your base insurance values annually.
• If you have completed renovations recently you need to increase your level of cover.
• Update your inventory lists regularly – importantly the sum insured for contents must represent replacement as opposed to book i.e. not depreciated value.
• Call on brokers to assist you in the revaluation process – we have access to valuation services, basic information relating to building prices and are able to assist in the business interruption assessments.