The risk of being under-insured

Being under-insured can have serious - negative - financial implications when something goes wrong. People are under-insured for various reasons, many do not even realise they are under-insured, while others only insure the bare minimum to save money. Unfortunately you’ll only discover the true impact of being under-insured when you submit a claim and find that only a fraction of the replacement costs you require can be covered.

Under-insurance happens when there is a shortfall between the actual replacement value of the items insured and the amount of insurance cover selected. You should review your policy every year as the replacement values of your belongings change over time. Your policy should reflect these higher replacement values to sustain adequate cover.

How does under-insurance come about?

Under-insurance is often a direct result of misunderstanding the term ‘replacement value’. The main mistake people make is considering the depreciated value of older items instead of considering the current value to replace insured items. Most insurance policies work on a replacement value condition. This means that all your movables will need to be replaced with new items when you claim, so you must use new and updated prices for all your insured items to ensure they can be replaced by new ones. If you insure items for less than a new one is worth, you will not be able to replace it.

People tend to think that larger items, such as wall units or dining room tables, will not be stolen so they avoid insuring these to reduce their monthly insurance premiums. You should bear in mind that these large items can also be destroyed by water damage or fire, which is why these items must also be insured for their full replacement value.

Ideally you should go through your home room by room listing all movable items. Smaller items like clothing, games, toys, etc. must also be included to ensure comprehensive cover and to avoid the financial implications of being under-insured.

People often think that by reducing their monthly insurance premium they will save money but in the long run they usually lose money. This happens because when you claim your insurance company will apply an ‘average cost’ to all items you have not listed in detail with an updated cost. This ‘average cost’ is usually less than the updated cost of a brand new replacement item, meaning that your insurance payout will not be enough to replace all your stolen or damaged goods. This is why it is so important to list all your belongings and to include the most recent cost for each item on your updated insurance schedule.

How to avoid being under-insured

Avoid being under-insured by completing an inventory form listing all the items in your household you want to insure, with their current replacement value. Remember to include all new items and to remove any items you no longer have. Now, should you claim, the current replacement cost will be calculated using your updated replacement values, and the insurance company will not need to apply the insufficient ‘average cost’ principle.

Items such as art works, antiques or any other items that may need a professional valuation must be valuated every year to ensure that the sum insured is updated and adequate.

The best way to be sure that you are adequately insured is to discuss it with your Garrun broker who will be able to accurately advise you on the principles to be followed when you calculate the replacement value of your household content.