Hands up if you have you ever lowered the value of something to less than it is actually worth, just to save a couple of hundred dollars on your insurance premium?
If you have, then you may have under-insured yourself.
Whilst we are always out to save a dollar or two, whether that be to save a few dollars on a packet of lollies, or by haggling with a car salesman to save a dollar, all of that is fine, but the problem is, that if you apply that same principle to your insurance, you could potentially under-insure whatever you are insuring and it could potentially cost you hundreds of thousands of dollars!
Now we know, there will be those that will be sitting there reading this article and complaining that insurance companies are just trying to make more money out of you, because the more you insure it for the more insurance premium you’ll have to pay.
Which is a comment we hear all the time, whether it be true or not.
Getting back to underinsurance, the other risk you may face if you have underinsured, is what is called the “underinsurance clause” which is written in the fine print of most insurance policies. An example of an underinsurance clause may be:
If the sum insured you select for your vehicle is, at the time of any loss or damage, less than 80 per cent of your vehicle’s market value, then the settlement you receive under Section 1 – Loss or damage to your vehicle, will be limited to the proportion that your vehicle’s sum insured bears to 80 per cent of its market value.
You insure your truck for $200,000 (premium $7260)
The true market value for your truck is $300,000 (premium $10,890)
80 per cent of market value: $240,000
You make a claim for: $50,000
$240,000 (80 per cent of market value) x $50,000 (claim)
= $41,667 (claim settlement)
Using the above example, you have saved yourself $3630 in premiums, but it has cost you $8333 when you have made a claim.
Yes, we know the next comment will be, “but if I haven’t claimed then I have saved $3630”. And that would be great, and we hope this is the case for you, but accidents are called accidents for a reason.
They happen to anyone, anywhere, anytime and that is the sole reason that you insure something in the first place.
In light of the recent flood catastrophe, it is important to note the following also regarding your home and contents insurance.
Many people have relied on a bank valuation to set the sum insured on their homes and commercial buildings.
These valuations that are prepared for a bank are typically conservative to protect the valuation company from a having to explain why their value was lower than what the bank sold it for during a distressed sale.
Another issue is the building value of interest to the bank and the value based on the sale price including the land, whereas for insurance, what is needed is the replacement value of the building excluding the land. Another in accurate valuation is where the insured or their accountant has relied on the written down book value of the asset, this can also lead to underinsurance.
Most of us have had our home valued for a bank loan and are shocked at how low a value they put on it, however this valuation is very rarely a true reflection of the real cost it will take to knock down and rebuild, sadly you only find out about this after it you are offered a claim payout which will leave you short hundreds of thousands of dollars short and not enough to rebuild, as many found out after the fires two years ago.
Preferably, we would suggest that the valuations for banks either have a separate section which shows the value for insurance purposes, or they clearly state that the value should NOT be used for insurance purposes.
This would protect the owner of the property from making this common mistake of underinsuring their homes and business properties.
Important: All information contained within this article should be considered as General Advice Only. This advice should only be considered as General in Nature and its intent is only to prompt the readers to investigate their own individual insurances. It has been prepared without taking into account the readers own individual objectives, financial situation or needs. Because of that, before acting on the above advice, the client or any persons should consider its appropriateness (having regard to their objectives, needs and financial situation) and seek further independent advice from their own financial advisor.