Under Insurance and the Condition of Average
Are you Fully Protected?
If a property is insured for less than what it is worth (known as underinsurance) the policyholder will not be reimbursed for the full amount of any loss.
In the event your property is underinsured, the net amount you will receive from a valid claim will be in direct proportion to the amount of underinsurance.
For example, if you have a sum Insured that is only half of what it should be, you will receive only half of any valid claim. The following serves to illustrate this principle:
Sum Insured : $100,000
Replacement Cost : $200,000
Amount of Loss : $ 50,000
Calculation Formula : Sum Insured x Loss
Replacement Cost
$100,000 x $50,000 = $25,000.00
$200,000
Policy Payment : $25,000.00 (Before deductible)
Insured's Contribution : $25,000.00
Any deductible will be subtracted from the final claim payment.
In the event of a total loss the policy will pay the lower of the amount of the loss or the sum insured. This means that in the event of you being underinsured and having a total loss you will receive only the sum insured.
The basic concept of insurance is that insured persons contribute to a pool based on the risk (the value of their property) they bring to the pool. If the insured does not pay premium based on his full exposure (i.e. if he only insures 50% of his risk) then he has contributed less to the pool than he should, and cannot take out of the pool the full amount of his loss.
The basis for calculating the sum insured is set out in the policy document. A professional valuation should be undertaken at regular intervals.
