UNDER INSURANCE RISK
Most buildings area covered by a Replacement with New policy, which is the very best basis of settlement as it protects you with “new for old” coverage. To maximise the benefit of this coverage, it does mean you need to ensure that the declared building value or sum insured is adequate to fully replace the asset(s)in accordance with the current building code and with today’s ever-increasing building costs.
We strongly recommend that for insurance purposes, a valuation is carried out every three years.
Are you familiar with the Co-Insurance Clause? [the penalty for being under insured]
A lot of people think that if they insure for $1,000,000 they have no risk of having to contribute towards a loss until such time as the loss exceeds that $1,000,000. This is simply not correct.
The co-insurance clause is found in most insurance policies and dictates that if you are under insured, only a proportion of the actual cost of repairing or replacing your asset will be paid by your insurer.
Here’s a simple example
Steven owns a three level office building and has insured it for $2,000,000. The property is damaged by fire with a damage bill of $1,500,000. The insurers determine that the actual replacement value of the building is $4,000,000. Steven is therefore under insured by 50%. Although Steven may think that the $2,000,000 cover he has is sufficient to cover the damage bill of $1,500,000, the application of the Co-Insurance Clause means that Steven is in fact an insurer himself for part of the risk.
Insurers typically allow some tolerance for being under insured. This is often set at 20% - hence the calculation is based on 80% of the true value of the building at the start date of the Policy
So the basis for the calculation is as follows:
Adjusted Loss = Sum Insured or Declared Value X The amount of the Loss
80% of the value at Risk (replacement value)
The calculation for Steven’s loss is:
Sum Insured (Declared Value) $2,000,000 X $1,500,000 (the amount of the loss)
80% of the value at Risk (replacement value $4,000,000) $3,200,000
= $ 937,500
The Insurer pays $ 937,500 less any policy deductible/excess
Steven wears $ 562,500 plus any policy deductible/excess