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23 September 2015

You are probably tired of hearing us bang on about underinsurance. We warn you at every renewal with a detailed example of the consequences, I have written articles on the subject in previous Planned Cover newsletters, we have a Risk Rule about it and there are often media articles about the chronic underinsurance epidemic in Australia.

The problem is that people continue to do it and if you need to make a claim on your policy it really does have a huge impact on your settlement.

Unfortunately I have a real example to tell you about today. Despite our recommendations to the contrary, one of our clients elected not to review their contents, fit out and business interruption sums insured for a few years. Over this time they had upgraded and purchased additional assets and their revenue had increased.

Recently they suffered a fire which destroyed a portion of their tenancy. Their contents and fit out sum insured was $25,000. After the insurance assessor attended the site and reviewed the damage it was determined that their sum insured should have been $60,000 to correctly represent the replacement value of their contents and fitout . This means that they were insuring 42% and self insuring 68% of any loss. After allowances for the 20% ‘buffer’ that the underinsurance clause in their insurance policy allowed for, the final outcome was that the client was self-insuring 45% of their risk.

The replacement cost of the fire damaged contents and fitout items came to $26,350. As the insured is self insuring 45% the insurer is entitled to reduce their claim payment by this amount. This is exactly what happened and the claim settlement amount paid by the insurer was 55% of the actual replacement cost.

Unfortunately the client had also underinsured their revenue under the Business Interruption Section of the policy. The actual revenue was $300,000 and they had insured $160,000 (self insuring 47%). Again the underinsurance condition will be applied to the interruption part of this claim and the actual amount the client will receive will be much lower than the amount that they would have otherwise earned.

To avoid this scenario happening we recommend that you
a) Insure for the correct replacement value of your assets and revenue/profit
b) Review these amounts at least annually and adjust when required
c) Consider mid policy term adjustments when purchasing significant amounts of new equipment

If you are unsure about the levels of cover you have insured, talk to your account manager here at Planned Cover. Whilst we can’t tell you what sum insured you should have, we can help you to understand what you need to consider when you are calculating it.

I want to acknowledge and thank our client who has allowed us to use their unfortunate circumstances as an example to all to help prevent this scenario happening to others.

Vanessa Collins
Manager Projects/Compliance