The Risks of under-insurance

Under-insurance is a situation where you find yourself insured for less than you have claimed for.

The most common scenario is where you have insured yourself for the market value of an item, e.g., your car, rather than its replacement value. This often happens if you don't reassess your policy regularly and change the premiums/ excess where necessary; every two years at least; you forget that what it's worth to you is a lot less than what it's value is in the marketplace, its book value.

Some clients believe that because they have been regular paying what they think are high insurance premiums for their vehicle, even though the four-wheeled donkey has seen better days, they will still be able to claim for the car as it was in its heyday. Not true.

In short, you can't insure an item for something that it's not; you can however insure an item for its replacement. If you want to replace something that was a high-powered, top-of-the-range vehicle, your premiums will rise in order for the insurance company to start investing money to be able to pay you out for an SLK class Merc when you drive over Chapmans Peak in your C class. It would be in both parties' interests for you to invest right now in an SLK 320.

The spin on the above reason many people under-insure is that sometimes people do so deliberately because they don't want to pay the cost of full replacement value and really just want to get token compensation for any loss or damage. They reason: 'If it's enough to cover the tow truck towing it away, I'll be quite satisfied."

Business news articles in these trying times are warning people: the rising inflation rate means there's an increasing gap between the (market) value for which you insured your goods and its real replacement value. Your policy may take a 10% inflation increase into account; what happens when this figure rises to 20%? It means that your claim will pay out half of what you expected to get.

Receiving an insurance claim is not about receiving a nice little cash bonus; that money is earmarked for something you no longer have or that you need to fix. If you're going to take out insurance, make sure you don't under-insure.

When you take out a policy you must make an objective inventory of the value of the goods you want to insure; thumb sucking a figure won't work. "Ach what. A lounge suite doesn't cost much from my uncle in the furniture business. And he usually throws in a free kettle."

Because insurers take all household contents into account when assessing your household policy premium, the average value of your goods will most likely appear to be much less than they are when more expensive items are taken into consideration, e.g. your plasma TV. Consider Alls Risks cover to make sure your moveable items are insured when you're at home or out of the house.

Being under-insured will initially save you money on premiums but if you do make a claim, the actual payment will correspond to the extent of your under-insurance. You'll have a spare kettle though which is always useful.