Declaring less could cost you more: Knowing and correctly declaring value of your assets can save you from Underinsurance
When it comes to insurance cover, accurately assessing the value of your assets can make all the difference. Have you ever heard of ‘Underinsurance’?
It’s a concept that may have significant financial implications if not properly understood.
‘Underinsurance’ is when building(s) or contents Sum Insured values fall short of their actual worth in the event of a claim. This means your insurance payout may not adequately cover the real costs of loss or damage – leaving you with unexpected expenses.
It’s imperative to understand what Underinsurance is and how it applies if/when you have a claim under a policy.
In this blog post, we’ll delve into the importance of accurately declaring asset values, the factors that contribute to Underinsurance, and steps you can take to ensure your cover aligns with the true value of your assets.
So let’s dive in and explore how to help safeguard your financial well-being through proactive insurance management.
Declaring less could cost you more: What is Underinsurance?
If you have Property insurance cover, you might think you’re protected from any loss or damage described in the policy wording. The reality is you may not be fully protected if you’ve underinsured. Underinsurance can have serious consequences in the event of a loss.
Underinsurance occurs when you don’t have the right values declared/listed under your insurance cover – these values are shown as Sums Insured. Under some areas of a policy, to fully protect your assets(s) you’ll need an accurate value that reflects the replacement/ reinstatement/ rebuild cost.
There are a myriad of reasons why Underinsurance may occur. Most commonly it’s when:
- You underestimate the value of your assets;
- You don’t update your Sum Insured when the value of your assets increases;
- You extend a building, make improvements or build a new one;
- You don’t regularly review your Sum Insured to ensure it keeps pace with inflation and its impact on rebuild/replacement costs that can take it over an insured value as time marches on.
The case study of a management committee…
Imagine being part of the management committee of a community hall in the picturesque countryside of Victoria, Australia. Your responsibility is to ensure the protection of this cherished community asset.
A decision has been made to purchase a property damage insurance policy for the hall Building without taking professional advice but believing that you have adequately safeguarded the asset with a Sum Insured of $300,000 for the Building itself.
Unbeknown to the committee, the true value/cost to rebuild the hall is a staggering $500,000. This stark discrepancy of $200,000 reveals a distressing truth – In the event of a claim, you are underinsured.
One night the building entirely burns down: Beyond repair, this is what the insurance industry calls a total loss. In the event of a total loss, the insurer will pay to the maximum insured value. This is $300,000 in this case study because it’s the value of cover purchased.
One night a wind storm rips through town: So we’ve discussed Underinsurance in the event of a total loss, but what if only the roof blows off causing a partial loss to the building, with a replacement cost of $180,000 to replace?
If your Sum Insured is $300,000, but the true value/cost is $500,000 the answer is the building is underinsured by 40%.
As you have only insured the building for 60% of the true value/cost, the insurer will only pay 60% of the cost of claim (60% of $180,000 = $108,000). The other 40% is your cost ($72,000). Again, the incorrect declared value in the Sum Insured has left you short of funds in the event of a claim.
Case study key take always…
The story of the underinsured community hall serves as a cautionary tale for all.
In both scenarios, the valuation discrepancy leaves the management committee financially exposed in the event of either claim.
Recognising the importance of an accurate valuation, the committee realised that engaging a professional valuer for an insurance valuation was not just common sense, but prudent risk management. It became clear that without a comprehensive understanding of the hall’s value, they were at risk of Underinsurance.
How do I know what my Sum Insured should be?
The responsibility for ensuring an adequate Sum Insured cover lies with you, the policyholder. You should source some professional/qualified advice but here are some general guidelines about Sums Insured, as insurance policies have a specific way of defining replacement value.
Let’s start with Buildings:
The Sum Insured value should be replacement cost of your building(s) constructed in same/similar materials as already there. It does not matter that it can be done differently in alternative materials, the standardised measure is to replace the existing on a ‘new for old’ basis.
So the starting point for determining a Sum Insured is the cost to build the property today using same/similar materials. This probably means you need to engage a professional valuer or similarly qualified expert.
Considering other expenses related to rebuilding:
When determining your building Sum Insured, not only should you consider a ‘new for old’ replacement cost of the building, but also the other expenses related to rebuilding, such as:
- Cost of demolition and removal of debris which would be required if the building was substantially damaged and has to be totally rebuilt. This cost should also include an allowance for removing foundations/footings.
- Where there’s an older building then rebuilding after a major loss may see the application of updated local planning rules which will have an impact on the cost of any rebuild. For example, disability access and amenities like toilets which may not in the current structure but will be required under revised building code(s).
- There may be modern requirements around fire sprinklers, fire hoses, smoke/heat detectors, or other mandated safety fit-outs such as additional fire exits. Perhaps environmental improvements apply, such as water recycling, water tanks, solar panels, or other passive energy design features.
- What is the cost of architect fees for plan/design submission to local authority/building development assessment panel? It’s also likely the building, depending on age and/or size and/or use, will require engineering specifications which are separate costs to architect fees.
- Do you have neighbors? If the site is in a residential area, noise and dust from repairs may have to be suppressed so neighboring properties are not inconvenienced. This may also impact on the value to be insured as it will impact on rebuild costs.
- Finally, if it’s a cost of (for example) $1,000,000 to rebuild now, what impact will inflation and increasing costs of building materials and labour have in the coming 12 months? After all, an insurance policy runs for a year so allowances should be made for these.
For the avoidance of doubt…
If there’s been no movement in the Sum Insured value(s) of a property for two years or more, then it’s likely to be underinsured and you may not have adequate insurance cover to meet the costs in the event of a major loss.
Still reading? Good!
We trust you get why a regular review of Sum Insured for buildings is important. Our recommendation is to consider getting the right base/starting point and consider using a qualified expert/advisor such as a professional valuer or building company if you’re unable to correctly value the assets.
Don’t forget about your contents – they have a value!
When it comes to insurance, many people focus on insuring their buildings and other property, but it’s important to pay attention to the value of the contents. Your group’s belongings, furniture, and other possessions can add up to a significant amount and they’re all at risk of damage or loss. Contents are also insured for replacement value, and the Sum Insured must stay relevant to the cost of replacing items at a value of new for old items. Therefore, we recommend you consider reviewing the values for these assets at the same time you review your buildings.
Don’t let inflation deflate your insurance cover: Underinsurance can be problematic when inflation is factored in…
As the ‘cost of living’ is impacted by inflation, so is the cost of building. Inflation increases prices/costs when building, rebuilding and buying new contents. That’s why it can get more expensive as time goes by – inflation is the general increase in the price of goods and services over time.
As inflation can significantly impact the cost of repairing or replacing damaged assets, it’s also important to regularly review the Sum Insured for these to cover the full cost in event of an insured loss.
Can LCIS value my assets?
Curious about how much your assets are worth? While we’d love to help you out, our staff aren’t certified valuers/appraisers. We’re just insurance experts. But don’t worry, we can point you in the right direction to find a qualified expert who can give you an accurate valuation.
Using a qualified valuer to assess your assets is a more reliable and accurate option than trying to estimate the value yourself. Valuers are trained professionals who have the knowledge and expertise to assess the value of assets accurately.
Valuers have access to the latest market data and use specialised techniques and methodologies to ensure their valuations are as accurate and reliable as possible. They have no vested interest in the value of your assets and can provide unbiased assessments unclouded by personal feelings, emotional ties or opinions.
Valuers also assess the value of the contents of a building. This can be especially important for organisations which have a significant amount of electronic equipment including computers, printers, furniture and fixtures (such as desks, chairs, and shelving) or high value items such as machinery, artwork, and collectibles.
Where to check your Sums Insured:
Unsure what your current Sums Insured values are? In the case of LCIS Business Pack policyholders - to check your current Sums Insured, take a look at the Business Pack Policy Schedule which is included as part of the Tax Invoice. This area of the document lists the Sums Insured for each of your assets.
It is important to carefully review all of the documentation to ensure the most relevant and up-to-date information has been provided and you understand what is covered.
If any changes are necessary, please contact us immediately. Remember, it’s your responsibility as the policyholder to inform LCIS of any changes to your organisation, such as new assets or changes in the value of existing assets. Failing to do so may impact your insurance cover.
Some final thoughts…
The bottom line is policyholders are responsible for checking they have an accurate Sum Insured.
To prevent Underinsurance, regular reviews and updates of Sums Insured are paramount. These updates should reflect the current value of your assets based on their replacement or reinstatement cost as per the insurance policy. If you find it challenging to estimate the value accurately, seeking the expertise of qualified valuers becomes essential. While the cost of a professional valuation may seem like an additional expense, it can be a wise investment in the long run.
By avoiding Underinsurance, you can help safeguard yourself against substantial out-of-pocket expenses and ensure adequate cover in the unfortunate event of a loss.
Got insurance questions? Our team is here to help
If you have any questions or need assistance regarding sums insured or any other insurance-related topic, don’t hesitate to reach out. Our team is here to help and can explain any points you may be unsure of. We want to make sure you have the right cover to protect you and your organisation in case of any unforeseen events.
Don’t have property cover?
No worries! Our Property & Asset Insurance (Business Pack) cover is designed to safeguard your group’s property and belongings against risks of loss or damage, including fire, theft, and accidental damage.
To get a quote and protect your valuable assets, download the application form, complete the relevant sections, and return it to us via:
Post: Local Community Insurance Services, GPO Box 1693 Adelaide SA 5001
Email: insurance@lcis.com.au
Fax: 08 8235 6448