What happens if the insurance cover or sum insured is not enough to repair or rebuild?
All property insurance policies including professional services, farm, business, home and strata insurance policies require the sum insured (declared value) when taking out insurance or renewing the policy to be the current cost of replacing the building, office, shop or factory. Not having enough cover to rebuild or undertake major repairs can cause major delays to repair or rebuilding, as well as have serious financial consequences.
For example, a factory and contents are insured for $700,000, however the rebuilding value is found to be $1 Million at the time of damage. In this case the insurer is likely to apply an underinsurance (also known as an average) clause, which all property policies include.
Not only would this likely delay repairs or rebuilding, but the claim settlement would also only be $612,500 (in this example), leaving a large shortfall of almost $400,000 in repair costs (based on a $1 Million building).
As property rebuilding costs change, so should the amount of your insurance cover.
Claim Settlement – worked dollar example
The following worked dollar claim examples are designed to assist you in understanding some of the benefits in this cover section and how claims are calculated.
The examples do not cover all scenarios or all benefits and do not form part of your policy terms and conditions. The following examples should be used for general guidance only.
You have cover for a building and are insured for “Reinstatement or Replacement”.
The total of all insured amounts of property in your policy schedule is shown as $400,000 (building of $380,000 and contents of $20,000) and the excess shown on your policy schedule is $250.
When setting the “Buildings” insured amount you must consider the costs to remove debris and payment of any architect fees.
The building is damaged in a storm and the cost of repairs is $200,000.
Standard claim settlement – Correct Sum Insured – no underinsurance
Cost of repairing the storm damage to your building $200,000
Usually, the building is repairable if the cost of repairing the building is less than the insured amount (in this example the insured amount is $380,000).
Removal of debris +$30,000 In addition to the damage to the building, the storm has created building debris that requires cleaning up and removal.
Less excess – $250
Total claim $229,750
Claim settlement with Underinsurance – sum insured below replacement value
In the above example, if the actual replacement value of all property at the premises at the time the policy was entered into was $580,000. However, the insured amount was only $400,000.
In this case Underinsurance will apply and the amount the insurer will settle the claim for is calculated as follows:
$400,000
Total claim of $200,000 x —————– = $172,414
(80% x $580,000)
Therefore, the insurer will pay $172,000 and you will have to pay the balance of the rebuilding costs.
Are you underinsured?
Contact one of our team….