Underinsurance: the clause that makes the insurer pay only part of a partial loss
Insure a 10 crore factory for 6 crore and the insurer may pay 60% of every claim, not just the big ones.
Property policies contain a condition of average. If the sum insured is lower than the true value at risk, the insurer pays only the proportion that the sum insured bears to the correct value.
How it plays out
Building and plant worth 10 crore, insured for 6 crore. A fire causes 1 crore of damage. Under average, the settlement can be reduced to around 60 lakh, even though the claim is well inside the sum insured. The penalty applies to ordinary partial losses, which is what most claims are.
Why sums insured drift
- Values set on book value or depreciated value instead of reinstatement cost
- New machinery added without endorsing the policy
- Construction cost inflation between renewals
- Stock valued at an annual average rather than at peak
What to do before the next renewal
- Value buildings and plant at what it would cost to rebuild and replace today
- Declare stock at the highest expected level, and use a declaration policy where stock swings
- Endorse mid-term additions rather than waiting for renewal
- Ask whether a reinstatement value clause and an escalation clause are in the policy
Send us your schedule and asset register and we will tell you whether the sums insured stand up.