There is a growing responsibility to have insurance to protect you when things go wrong, but what happens when your insurance does not cover your personal belongings or business when something does in fact go wrong? One of the least documented issues that many individuals or business owners face is under-insurance.
You could be unaware that the insured values of your assets may have dropped well below current replacement or repair costs due to the current economic climate. Our aim is to provide you with the knowledge you need to ensure you do not fall victim to under-insurance. Throughout this article we will present you with case studies and working examples of how under-insurance affects you as an individual or as a business owner. You will also learn the important questions to ask your broker safeguarding your assets in the event of a claim. With the correct knowledge you will have the control over the cover that your business and personal belongings get.
Under-insurance is a harsh reality, one that you may be forced to deal with when you are already involved in a claim that has left you with a pay-out less than what your items had been insured for. The knowledge gained in this document will ensure that you have the peace of mind that you are adequately insured.
Your broker plays a crucial role in assisting you as an individual or your business to assess your insurance requirements and insured values. IUM recommends that your broker reviews your policy annually to specify any new assets that have become a part of your lifestyle as well as updating the current replacement values of these belongings.
What does it mean being under-insured?
Under-insurance has serious implications for the replacement of your valuables, from personal items to plant and machinery in a commercial business. In order to best describe what being under-insured means to an individual or a business owner we aim to explain how under-insurance can happen to you. Insurance has become a staple to the average person’s lifestyle, but with insurance comes the responsibility to ensure that your policy has the best cover that is tailor-made to suit your needs, or the needs of your business.
Through this we aim to make you aware of the steps you can take to have your broker adequately cover your values and provide you with a policy that has been formulated as per your own specifications. As an example, certain policies and/or sections contain an average clause, that is, if you insure a piece of equipment for R100 000, with a replacement value of R200 000, the item is 50% under-insured. Should a loss of R50 000 be suffered by you the insurance company may pay only 50% of the claim, due to the principle of average, R25 000. The balance is then left for you to pay.
There is no better saying for this issue that many people are facing than ‘if you don’t ask, you don’t get’. We want you as an individual to ensure that your assets are protected. You can get the insurance cover you need by asking your broker the right questions to prevent a potential financial loss. When you have the correct knowledge you are able to ask the right questions, as well as an understanding of the cover you will receive on your policy. With the right insight about what cover your policy can offer, you are able to put across your needs more successfully. If the amount needed to replace all your insured property with similar new property at the time of a loss or damage, is more than the insured amount, your insurer may not pay you the full amount of the loss or damage. You will be your own insurer for the difference between the insured amount and the amount needed to replace all the insured property. Therefore, you will be responsible for a relative share of the loss or damage. Let us assume your property is insured for R500 000, and the current replacement value of your property is R1,000,000. This means you are only insured for half of the replacement value. You must cover the other half. For example, if you suffer damage to the value of R100 000, your insurer might apply the principle of average* and only pay half of this amount, which is R50 000.
To that end, the following items are commonly under-insured:
Insured at market value instead of replacement value to rebuild the building
Cover is generally taken out on perceived value instead of the actual new replacement value
Machinery and plant
Changes in asset values, import costs and volatile markets often get ignored
Continuity plans and insurance pay-out to cover this is essential. People often overlook vital cost factors such as:
The connection of services
Removal of debris
Lead times on replacement equipment
Fit out, testing and commissioning
You as an individual handling your personal insurance might see it as a hassle to compile an inventory of your personal goods or be unwilling of pay for a professional valuation. The problem with not getting a professional evaluation is that you may end up guessing the insurance value of your items Insurance is then taken out on ‘perceived’ values instead of getting actual replacement values, thus causing you to be less than impressed when you receive a claim settlement that does not cover the current values of your items.
We have come to notice that insured individuals tend to be totally unaware of the issues within their policy until it comes time to submit a claim. The personal assets that aren’t specified with their current replacement values in your policy could then, at a claims submission stage, rear their head when it is too late to make the necessary adjustments to ensure you receive a fair pay-out.
On the business side of things, owners tend to take their asset registers and apply depreciation to the values of plant and machinery and often base their insurance cover on these values. To prevent any potential financial loss if the equipment needs to be replaced, you should actually be applying current replacement values of your insured equipment.
How could being under-insured affect you?
We leave our possessions in houses that have alarm systems, high walls and even electric fences to keep everything safe and to prevent any of those personal belongings being stolen. Your possessions such as television sets, lounge suites and electrical appliances have been purchased with hard-earned money and the last thing that anyone imagines happening to their personal possessions is a loss, and worst of all, your insurance policy not paying out fully in such an event.
It is always recommended that your regularly update you contents sum insured when you acquire new items. This is to protect you should the time come when a household item needs to be replaced, such as a high value fridge that you have purchased for your family, due to an lightning or flooding; you don’t want to be left with having to settle for a lesser quality item simply due to the item not being insured for the correct value.
Your insurance premium could be of a reasonable amount due to your house having an excellent armed response unit fitted. But the fact remains that you could still have an incident that leads to a claim that could result in you having to replace important household objects such as a fridge, washing machine, televisions or home theatre equipment. Could your family bear the brunt of having to pay out for those items if your insurance only contributes a small portion of the claim?
How does being under-insured affect your business?
Huge financial losses could be imminent for business owners should the need arise to rebuild or make repairs to business structures or equipment that has suffered an insurance loss and are found to be are under-insured. You have the responsibility to make sure your cover reflects the replacement value of your stock, equipment and/or buildings.
With your growing business you may expand your premises, buy new equipment, install a new production line or diversify products. A common pitfall is not reviewing your policy regularly when these changes to your business are made. Should an accident take place that requires you to submit a claim, the value that you are insured for will unfortunately no longer reflect the true replacement value of your business’ assets. Your insurance policy should be updated constantly as your business grows to ensure that you are sufficiently covered.
To prevent the assets within your business being under-insured we recommend taking the time to assess the potential risks your business could face. You and many other business owners could underestimate the importance of a proper assessment of your business. A business risk assessment includes the risks you face and what cover is available to you according to the unique risks your business may encounter. We are able to put you in touch with qualified insurance advisers who can assist with your risk assessment.
Like many business owners, your business is your livelihood, but running your business with the mindset of ‘it won’t happen to me’ is detrimental to the cover you will receive in your policy. You may carry that mindset along with you when your policy is formulated in order to save on your monthly premiums but when an incident such as a burglary, delivery vehicle accident or equipment breakdown happens, it could cost you thousands to millions of rands in replacement costs for the sake of saving a few hundred rands on your monthly premium.
Commercial building owners are at a high risk of under-insurance with the costs of construction having increased over the last few years that they could be completely unaware of. Unless you are in the construction industry, underestimating rebuilding costs is almost a guarantee. Another issue is that as an owner, you could wrongfully believe the cost to rebuild and the current market value of the property are one and the same. This is something you could talk to your broker about to get a better indication of the costs involved with your building should you have to rebuild in the event of an accident.
“The relationship between yourself and your insurance broker is pivotal in ensuring you are covered with the right level of insurance.”
It’s not uncommon for policy holders to simply forget to make adjustments to their policies when their business grows, this is why we recommend having your broker review your policy on a regular basis that will allow for any parts of your growing business that you may have overlooked. For example, you may have launched a new product that has been well received by your customers, now with the new business you are required to purchase more machines to keep up with the production demand but neglect to tell the insurer about these new additions to your business. If these improvements or items are not added to your policy, you will unfortunately not be covered. Your communication of your needs can provide the necessary specifications when building your policy, but your specifications are only impactful when communicated effectively and frequently between you and your broker. With your broker shedding light onto the serious risks associated with underinsurance and improper risk management, the peace of mind you will have with the handling of your policy can go far in helping your business continue to thrive.
You may only find out that your business is underinsured when you experience a major loss event and you need to make a claim. If your business is underinsured, it means that you possess policies but your assets are valued and insured at less than their true value, leaving your business poorly protected. Your short-term savings on your monthly premiums can never compensate for out-of-pocket payments you may need to make to cover your insurance payout in the event of an accident.
It is your responsibility to take action with your broker to ensure you increase your cover to suite your businesses requirements. You would benefit, in the long run, to review the contents specified in your policy on a regular basis and compare the prices that you paid for your assets to the prices it would cost you to have them replaced. It will be absolutely surprising how much your equipment has been upgraded or added to your business over a 6 month period that should be included in your policy. We recommend every 6 months being the benchmark for how often you should be comparing the prices of your equipment and any other components that make up your business. This will primarily ensure that you are sufficiently covered, with the market prices of your assets changing on a regular basis, but will also help you avoid financial stress in the event of a claim.
“We recommend that you compare the prices of your equipment and any other components that make up your business on an annual basis. This will primarily ensure that you are sufficiently covered, with the market prices of your assets changing on a regular basis, but will also help you avoid financial stress in the event of a claim.”
Your insurer will compensate you for the replacement cost of your buildings if you suffer loss or damage. But it is important to realize that you will only be compensated for the sum that is insured on your policy, this excludes your excess. On the other hand, if you do not have insurance for the full value of your buildings, your insurer will only compensate you for the percentage of insurance you do have available to you. This means that you will be responsible for the difference after you have been compensated by your insurer. Costs that you should take into account for your business insurance should include demolition charges, making the site safe, removal of rubble, fees for professionals and municipal fees.
For example: If you insure your business (the buildings) for R300 000 but its value at the time of the loss or damage is R600 000, your insurer might only compensate you for 50% of the loss you suffer.
The bottom line is that being an underinsured business owner could compromise your business’ entire survival. A single loss event, no matter how minor, could be disastrous if a business is underinsured. You would then receive an insurance payout that would not be able to cover the losses you have suffered to return the business to its pre-loss position.
The process of a claim
When you suffer a loss that results in you making a claim for your business or household contents, through an insured peril or burglary, an insurance assessor will be appointed by your insurance company to do a full inventory of the damaged items as well as the non damaged items where the incident has taken place. The assessor will add the value of all damaged property including property that is not damaged to make up the sum insured of the specific section that will respond to the claim. Your insurer will use the ‘actual replacement value’ amount and compare this to the ‘total sum insured’ that is covered under the specific section of your insurance policy. Please refer to your broker to advise which sections of your insurance policy this will apply to and specifically refer to the clause “Average” which is explained here above.
How to avoid being under-insured
Ensuring you have the correct cover to suit your needs is the only way you will be properly protected should the time come to make an insurance claim. We are able to put you in touch with financial consultants who are available to you for advice and guidance to create a policy schedule that will give you peace of mind that you will not suffer any financial loss when accidents happen. You owe it yourself and your business to adequately cover all the items you have accumulated.
The unfortunate reality is that many people tend to think that it’s only electronic equipment and furniture that make up your household contents. To the contrary if you add up all the utensils, cooking equipment, pantry stock and clothing you will be surprised. These are little parts of your lifestyle that add up that could drastically affect you should you lose them in a fire or flood. Business owners, could be fully covered for each and every item in their building, but in the event of damage to the building that prevents you from running your business in the building itself, it is vital to have business interruption cover. This will protect your business and in turn your livelihood.
In conclusion, with the knowledge you gave gained from this article you are now aware of the huge financial losses that you could suffer in the event of under-insurance. This has the possibility to affect your business and personal insurance, no part of your lifestyle should have less cover than the rest. With this information we urge you to take the time to re-evaluate your policies on a regular basis and utilise your broker to ensure that you are getting cover that is suited to your needs and lifestyle.
Article credit http://www.fanews.co.za/article/short-term-insurance/15/general/1217/are-you-under-insured/21120