If you are wondering why your insurance claim was denied, or you got paid out much less than expected, underinsurance could be the reason.
We are contacted on a daily basis by distressed home or business owners who got paid only a fraction of their insurance claim. In many cases this is due to being under insured.
Policy holders often reduce the sum insured in order to reduce the cost of their insurance premiums. Unfortunately, this is often to their detriment as in case of a loss, they are only entitled to the proportion of the claim settlement, due to the “average “ clause.
The small print included in the majority of property policies includes a clause, which allows the insurance company to deduct a percentage of the claim settlement in application of average.
Here how this close works. Following a loss e.g. fire, an Insurance Loss Adjuster appointed by your Insurance Company will arrive and measure the property. He will then apply the applicable insurance rate/m2 and add in for outbuildings, extras, fitted wardrobes etc.
If they find that the sum insured is adequate then no deductions are made. If the sum insured is inadequate (you are under insured), they will apply the “average clause” to your insurance settlement.
Average is used to determine the amount your insurance company is liable for following a loss and it is calculated as follows:
- Let’s assume that Value at Risk of your house, as outlined by the Society of Charted Surveyors, is €300,000 (this depends on a number of factors)
- Your Sum Insured as specified in the Insurance Policy is actually €200,000. You are therefore under insured by €100,000
- Let’s assume that a fire occurs and nearly half of your house is destroyed.
- As per builders quotes, to have it re-built/repaired it will cost you €120,000. You therefore file an insurance claim for €120,000
- Unfortunately, as the Sum Insured is only €200,000 instead of €300,000, the insurance company assumes that you are responsible for 33% of the risk on this property. They therefore are only liable to pay our 67% of the claim (this is the average clause)
- As a result of underinsurance you have to pay €40,000 of repairs out of your own pocket.
This also applies to the contents section of your policy.
We are dealing with claims on a daily basis and in the current economic climate insurers are looking for ways to reduce or refuse cover at every opportunity. It is extremely difficult to get your full entitlement following a loss even when you have 100% adequate cover, so it makes it even more difficult if you are underinsured.
Get a Policy Review and Avoid Costly Underinsurance
In order to avoid this scenario, it is prudent to get a policy review carried out every year and update your Sum Insured, if there are any changes to the value of your house or house contents.
A policy review would help you determine a sufficient level of cover for both the buildings and the house contents. Don’t risk losing thousands in compensation for the sake of saving a hundred Euro in premiums.