Under Insurance - a big issue

Managing the Risk of Underinsurance

Under insurance is often highlighted after a wide spread natural disaster along with the other major issue, Non-Insurance (discussed elsewhere).

 Too many people do not carefully insure for the full replacement or reinstatement value, leaving them well short in the event of a total loss. In fact it can be even worse if there are Average or Co-insurance clauses in policies. These are applied to minor losses and basically pay the same percentage of a minor loss as you should have been insured for (though the Insurance Contracts Act specifies a slightly different formula), if insured for less than 80% of the full replacement value.

Check these figures out from a 2007 report on the issue by insurer CGU :

  • 83% of businesses have inadequate building insurance
  • 47% are not adequately insured to replace stock and contents
  • 50% have insufficient liability insurance
  • 2% only of businesses have adequate business interruption insurance
  • 15% do not adequately insure Plant & Machinery
  • Most businesses have poor or inadequate security measures to contain or prevent burglary losses
  • Many businesses do not realise their leases make them responsible for the Shop Front Glass
  • Many Businesses fail to take into account their fixtures and fittings, particularly when updating them

 

What is Under-insurance?

The Insurance Council of Australia defines this as “the result of nominating a value for an asset such as your home that is too low to actually replace it in the event that it is lost or damaged”.

 In 2005 the Australian Securities and Investments Commission (ASIC) estimated that 70% of Australian homes were underinsured. While Average Clauses seem to have largely disappeared from Householders policies, it is a total loss claim where the crisis of under insurance is highlighted. Yet it would not have cost much more to fully insure.

 

 Why do people under insure? 

While some may deliberately choose to under insure to save money on their insurance premiums, the majority of these appear to be due to these issues being overlooked by policy holders.

An Insurance Broker may review your insurance needs each year, he can only go by the information provided by the Insured. Insurance Brokers are not Valuers or Estimators. The Insured needs to know what his assets are and needs to obtain specialist assistance to calculate what it would cost to replace or reinstate them.

Many insurers can offer tools to assist such as Calculators on their Web Sites, or links to Valuers who can provide estimates. However these rely on the information you provide, such as the Square Metres of the Building. Often there are subjective figures that need to be included such as anticipated Consumer Price Index allowance, attitudes and by-laws of local councils, availability of Builders in that area at that time.

 Avoiding the pitfalls of underinsurance is really a matter for consumers. Only the owner of a building or its contents can take responsibility to determine the amount of insurance they wish to take out over their assets.

 

Why does it matter?

If you are in Business, you have a duty of care owed to all the other Stakeholders, including Shareholders, employees, suppliers, customers to adequately deal with the risks exposed to the Firm or Organisation. Small to Medium Businesses find the most cost effective way to manage the risks to their assets by transferring the risk to Insurers. However, if not insured for enough, they are effectively self-insuring (called co-insurance) the difference. Do you want to expose the Company to even greater expenses in the event of an un-expected event? 

Under-insurance in Business Package policies

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