Insured individuals are often caught off guard when they file a claim and receive feedback that they are supposedly “underinsured.”
Have you ever heard someone say their premiums are always up to date, but the insurer is unwilling to pay when disaster strikes? In most cases, the intermediary, such as PWM, is also in the line of fire.
IT IS, HOWEVER, EXTREMELY IMPORTANT THAT PEOPLE UNDERSTAND THEY ARE RESPONSIBLE FOR THE ACCURACY OF THE INSURED AMOUNT — NOT THEIR INTERMEDIARY OR INSURER.
Underinsurance is when the amount paid out in the event of damage or loss is less than the cost to replace those goods/infrastructure.
Although the payout will help recover part of the replacement costs, the insured individual will have to cover the rest.
The principle applied is called “average.” It involves that, where items are underinsured, the insured must take a proportional part of that loss upon themselves, technically becoming their own insurer for the part of the “loss.”
The concept of “average” is precisely applied to prevent underinsurance and ensure the insured pays the full premium for the risk carried by the insurer. This ensures that each party bears a fair portion of the claim.
It is also important to understand the term “replacement value.” This is what it will cost at the time of filing a claim to replace the damaged goods/infrastructure with similar items.
Therefore, if you have paid premiums for an amount lower than the replacement value, you will be responsible for a portion of the claim.
To avoid underinsurance, it is important to consider that the replacement value of items changes over time. It is also wise to have high-risk items valued by an expert.
Furthermore, I suggest keeping an inventory with replacement values and having your policy reviewed annually accordingly.
For those who have not yet dealt with “average,” I provide the example where you insure equipment with a replacement value of R20,000 for R10,000.
If it gets damaged and costs R5,000 to repair, the payout will be calculated as follows: [R10,000 ÷ R20,000] x R5,000 = R2,500. This is not a complicated calculation.
Keep this calculation in mind if you are someone who neglects to adjust the insured amounts annually.