Under Insurance | In a nutshell, you need to an insurance policy review carried out periodically to avoid under insurance.
Under insurance is a situation when the sum insured of the insurance policy is less than the re-instatement value of your property. While under insurance may result in lower premiums paid by the policy holder, the loss arising from a claim may far exceed any marginal savings in insurance premiums.
Don’t gamble with your insurance cover. Ensure that you are fully protected by getting an independent policy review to establish correct levels of insurance.
We deal with cases on a daily basis where the home owner or business owners are under insured and following a loss, they only get a fraction of their claim, due to “the average clause”.
Under Insurance and the Average Clause
The majority of property policies include a section, which allows the Insurance Company to deduct a percentage of the claim settlement in application of average. How does the Average Clause work in practice?
The following is an example of how you can be penalized by the Average Clause
- When taking out a household insurance policy, you tell the insurer the value of the buildings or contents you want to insure e.g. €200,000
- The actual Value at Risk (House re-instatement value) as outlined by the Society of Charted Surveyors is €300,000
- House Sum Insured as per policy is €200,000 (your policy could have been taken out a few years ago and the Sum Insurance was never re-adjusted)
- A fire occurs and the loss of €120,000 is agreed with insurers
- Because the actual Value at Risk €300,000 and your insurance is only €200,000, this means that your insurance covers only 66.67% of your house. 33.33% value of your property is regarded as Self Insured.
- Although your total claim is for €120,000, your insurance company will only pay you out up to €80,000. You will have to cover the remaining €40,000, because your property was under insured.
The average clause also applies to the house contents, so if you made any significant purchases or re-decorated your house, you should also adjust the Sum Insured in your house contents section.
In order to avoid this scenario it is prudent to get a policy review carried out. A policy review or pre-loss survey would recommend a sufficient level of cover for both the buildings and contents cover for insurance purposes.