The majority of commercial insurance policies in the Australian market contain an underinsurance clause.

The clause was designed to discourage potential insureds from under declaring their assets.

It works by ensuring the settlement of a claim by the insurer is reduced proportionately, based on the level of under insurance revealed at the time of a claim.

In most Business policies the Co-insurance or underinsurance clause applies if the values declared are less than 80% or 85% of the replacement values (depending on the insurer), thereby allowing a 15% – 20% margin for fluctuations in values, or errors in valuation.

The following example demonstrates how the underinsurance clause is applied to a loss at settlement:

Let’s assume the sum insured for a building is declared by the insured at $1,500,000
But the actual total replacement value for the building is actually $2,000,000
For the purpose of underinsurance calculation 85% (of $2m) equates to $1,700,000
The building suffers a partial fire damage for $ 500,000
Actual loss $500,000 x Declared value $1,500,000 85%
of actual replacement $1,700,000
Insurer will pay out $441,176
Leaving the insured to pay $58,824

The more the insured is underinsured, the more the insured shares in the loss or self insurers.

What can lead to underinsurance?

A number of factors can lead to an insured being underinsured, such as :

  1. Failing to obtain a valuation every so 2 – 5 years depending on market conditions and property or asset size.
  2. A failure to review your sum insured every renewal resulting in a stagnant sum insured over the years whilst the market moves.
  3. A renovation or addition to your property and failure to notify the insurer.
  4. A purchase of large items, such as electronics or furniture.
  5. Failure to consider other costs as part of building, such as demolition, removal of debris, architect costs, council permits etc.

If your need assistance talk to one of our specialty brokers who can assist you with valuers or provide you access to general industry tools that may assist you.

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