How to avoid being under insured

Jul 18, 20173 min read

The recent fires that burnt a path of destruction in and around Knysna left many clients devastated. They were forced to leave their properties during cautionary evacuations or due to life-threatening danger. As the victims were overwhelmed by traumatic circumstances beyond their control, it is understandable that they did not adhere to the terms and conditions in their short-term Insure policies.

Updating your insurance policy regularly is a very important part of homeownership. However, it can be difficult to know exactly how much coverage you really need. Clients often forget that when their houses are damaged and they need to claim from insurance, that money isn’t supposed to be used to buy an equivalent home – it’s used to fix or rebuild your damaged property. Therefore resale or market value is almost irrelevant as far as insurance is concerned. It is of the utmost importance that clients make sure they’re covered for the amount needed to rebuild their home from scratch.

The cost to build a home on an empty stand can vary from 10% to 30% more than buying an existing property, and that’s excluding any costs involved in clearing rubble or removing unsafe structures. In the case of rebuilding a damaged home, this can add significantly to the cost of repair or replacement.

It is very tempting to leave insurance premiums at low levels – but this can be fatal in the long run. Premiums should increase as the house’s value increases.

South African banks, which almost always insist on a buyer taking out insurance on his property (often through the bank’s insurance branch) on signing of the bond, sometimes neglect to warn the owner that the insurance policy automatically lapses when the bond is paid off. There have been cases where burnt down or badly damaged homes turned out to have no insurance cover at all for this reason.

Home-owners who have paid off their bonds, should remember that the content of their houses still needs to be insured.

Under insurance can be defined as the situation where your insurance cover – the amount your policy will pay out in the case of a loss and a subsequent claim – is less than the cost to replace the lost items. This obviously implies that while your insurance pay-out will help you towards replacing your losses, you will still have to partially fund this replacement.

Under insurance occurs when there is a shortfall between the amount of cover chosen and the actual replacement value of what is being insured. The result is that you will only be paid a proportional part of your claim. In the event of a claim the principle of ‘average’ would be applied

A few suggestions on how to prevent being under insured:

Keep in mind that the replacement values of goods change over time.
If the policy is not reviewed and the higher replacement value is not taken into account, cover becomes inadequate.
You – or an expert – need to do a realistic estimate of the true replacement value of your insurable assets, equipment etc.
Remember that you can’t insure an item for something that it’s not; you can however insure an item for its replacement.
Update your household inventory list or other lists of assets on a regular basis to ensure that new items are included and to remove items that you no longer have.
If you fail to list the values of your new DVD player or TV; you would probably not be insured adequately.
It also does not make sense to be paying to insure your old washing machine when you have just replaced it with a new one with a higher value.
Pay special attention to specialised items where specialised insurance is required.
Farmers are advised to regularly review their policies to ensure that natural disasters such as the recent floods or fires will not bankrupt them. It is best to contact a specialist agricultural broker for a full risk evaluation and expert advice on the precautions, potential threats and the insurance required to cover weather and natural disaster-related claims.