Are you underinsured? Are you comfortable bearing this risk?
Do you understand the implication of ‘average’ being applied at claim stage?
Unfortunately, it is common for people to assume that they can insure ‘selectively’ or whatever amount they would ‘like’ to have insured to be adequately covered. This is a mistake that, in the case of a claim, would be regrettable.
By way of an example, let us shed some light on the consequence of ‘average’ being applied at claim stage.
Household contents is best explained by way of imagining your roof being removed and your house being turned upside down. Everything that falls to the ground is considered contents. These items must be insured on ‘new replacement value’ i.e. what you would pay today for the exact same item at a store.
In respect of your building, the insured value is based on the replacement cost which is not the market value or valuation obtained by the council. This means that you must not insure the building based on what you could sell it for, but what would it cost to re-build, taking into consideration but not limited to: Structure, Boundary walls, Driveways, Underground services, Professional fees, Disposal fees.
Mr Smith has insured his property (or contents) for R150 000 and since coming on cover 3 years ago, has not increased his value at risk to be in line with current market values. Mr Smith now suffers a loss of R20 000 and submits the claim to the Insurer. At the time of the claim, it is established that the replacement value of the property is actually R200 000. In terms of the policy and the condition of average, due to him being under-insured, his claim will be proportionately settled, using the following calculation.
R150 000 (Sum Insured)
___________________ X R20 000 (Loss) = R15 000
R200 000 (Value at Risk)
Settlement to Mr Smith will thus be R15 000. A total of R5 000 less than his total loss claim.
By way of this example, one can agree that the implication of ‘average’ being applied at claim stage is significant.
At JH Allen & Associates we strongly believe in understanding the implications of all your financial decisions. We assist you in understanding the risk you choose to bear and provide you with custom solutions for your needs.