Case Example - Underinsurance
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Case Example - Underinsurance

Underinsurance – A Common Problem…

Being insurance brokers, we have seen many situations where a client has not had any cover and we need to sort something out last minute. We think it’s safe to say no one wants to be without cover and face the risk of an uninsured loss. So if you are of the same opinion as us and would never leave a property uninsured, why would you leave your property Underinsured!

Underinsurance occurs when a property is not insured for the full value it would cost to rebuild. Most buildings insurance policies include an average clause which penalises the insured by reducing the claim by the same % that the property is underinsured at the time of the loss.  It’s estimated around 80% of property in the UK is underinsured so this is a significant issue which we are trying to raise awareness of.

Where Best Advice Pays

There is no better way than giving a real life case where, when the right advice is given and taken by the client, everyone is better off as a result. This may be despite an initial increase in premium.

A property owner client of ours owns a large commercial premises which was initially valued at £7,612,500 to rebuild including professional fees and costs. On the advice we provided to the client, a buildings reinstatement cost assessment was undertaken and the value to rebuild the property increased to £11,339,850. Meaning, prior to this, the property was underinsured by £3,727,350 or approximately 33%.

Using our definition above, in the event of any claim occurring at the property, the total value of the claim would be reduced by 33%. Our advice was to increase the cover to reflect the new valuation so that the property was correctly insured. In order to do this the additional premium was approximately £5,200, which to some may seem costly. However, after what happened next our clients were very grateful that they chose to take the advice and pay the initial extra cost.

3 months following the additional premium being paid, the client experienced a significant fire claim in the region of £600,000. Two examples are set out below, one before the property had been revalued and another after the property was revalued to show the difference in outcome for the client.

The Figures

 

No Valuation

Valuation

Insured Buildings Declared Value

£7,612,500

£7,612,500

Correct Buildings Declared Value

£11,339,850

£11,339,850

% UnderInsured

33%

33%

 

As no valuation has been carried out, the insured is not aware that the policy needs amending.

£5,200 Additional Premium to arrange for policy to be correctly insured.

 

Then the landlord suffers a large loss

Then the landlord suffers a large loss

Total Claim amount

£600,000

£600,000

Reduction in Claim

£200,000

£0 – No Average condition

 

 

 

Claim Payable after Average

£400,000

£600,000

This example of the difference in the amount of the claim paid, show that by being correctly insured and paying an additional £5,200 in premium the client was £194,800 better off from taking the advice.

Don’t leave things to chance, you wouldn’t leave your property uninsured so don’t be caught out by leaving it underinsured!!

What To Do Next?

If you are unsure on whether your property is correctly insured and want to speak to us for further advice, give us a call on 01789 761 660.

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