Under-insurance also known as the ‘Average Clause’ or ‘Co-Insurance Under Insurance’ can be applied to your claim when you have not insured your property for its full replacement value.
What are the implications of being underinsured? A claim may be reduced in proportion to the amount of the under insurance property. Even in the event of a partial loss you will be deemed to be assuming a percentage of the risk and you may not receive a complete pay out.
To show you the impact under-insurance can have, consider the following example based on a policy with an 80% co-insurance clause:
Adjusted Loss = (Insured Value/ Replacement Value) x Loss
If you insure your building for $500,000 and the true replacement value of the risk is $800,000.
The building is damaged by a storm where the repair bill is $200,000, as the sum insured is less than 80% of the replacement value the policy would respond as follows:-
Adjusted Loss = ($500,000 / $800,000) x $200,000 = $125,000
As you can see despite an actual $200,000 repair bill – the under-insured loss would result in a payout of only $125,000 which would leave you $75,000 out of pocket.
Which types of policies does it apply to?
The ‘Average clause’ is present in commercial policies, domestic home and contents policies should not be subject to ‘under-insurance’ however its best do your research by reading the PDS (Product Disclosure Statement) or discussing it with your insurer or broker before taking out a cover.
By under-insuring your property, you place yourself in serious financial risk. It’s important you regularly review the sums insured of your property, taking into account the replacement cost including any new purchases.
More information can be found in our ‘under-insurance’ brochure alternatively contact our office if you have any questions.