When you take out an insurance policy, you are required to explain the value of the property (or its contents) that you want to insure. This value is known as “the sum insured”.

In some cases there will be a discrepancy between the value of the property and the value of the sum insured. If the value of the property is higher than the sum insured – this is known as “under-insurance”.

Why? Because in the event of a total loss, the sum insured will not pay for the full value of the claim.

What remedies do insurers have for under insurance?

At the time that any claim is made for loss under an insurance contract, whether this is for a partial value of the whole sum insured or the entire value, an insurer may assess the value of that property as part of the claims processing routine.

If the insurer discovers that the claimant is “under-insured” they may, if there is a clause in the contract (and there usually is), “apply average” to the policy.

What does “apply average” mean?                                      This means that the insurer is allowed to reduce their payout in the event of the claim in proportion to the amount under-insured.

Let’s take an example:                A policyholder insures his home and contents for R200,000.    He makes a claim for R50,000 following a fire.                       The insurer assesses the total value (before the fire) of the home and contents to be R250,000.

Thus the household cover was only for 80% (R200,000/R250,000) of the actual value.

Thus the payment made when the insurer chooses to “apply average” will be 80% of R50,000 which is R40,000.

What is the replacement value of goods?                                     It is important to also understand the term replacement value:

The replacement value of goods is what it would cost you, at the time of a claim, to replace all your belongings with similar brand new ones.

If your home is insured for replacement value and you submit a claim, your insurer will calculate the replacement value you should have insured yourself for.

If you insured your belongings for less than that, your insurer will only pay a part of your claim.

Why would a person be under insured?                                  The reasons for being found under insured can be either oversight on the part of the insured or his or her deliberate choice!

Oversight                             With inflation there’s likely to be an increasing gap between the value for which you insured your goods and their real re-placement value over time.

Your policy may take an 8% inflation increase into account, but the replacement value of your goods might increase by 15% a year. Over time your goods will be insured for less than their replacement value.

You might also purchase expensive new “big ticket” items like a plasma television, or a top of the range sound system, thereby increasing the value of your household contents, without increasing the stated sum assured on your policy. Many people are just not vigilant enough when it comes to updating their policies and inventory lists. This is probably the most common sort of under insurance encountered.

Deliberate choice:                    Sometimes it is just too expensive to insure the items to their full replacement

value, and some reason that, while they won’t be able to replace the exact item, some sort of financial compensation for their loss is better than none at all.

These insured clients under insure their goods in order to save a bit of money on their monthly insurance premiums.

How to avoid becoming under insured                                    “You need to review your insurance policy every year, not merely renew it,” Dennis Jooste, the former Ombudsman for Short-term Insurance, once advised.

When reviewing your policy you should make sure that you are insured for the right amount. You need not wait for a policy’s anniversary to review your policy; you can do this any time.

Keep in mind that the replacement values of goods change over time.

You – or an expert – need to make a realistic estimate of the true replacement value of your insurable assets, equipment etc.

Remember to include not only major furniture, appliances and electronic goods but also sports equipment (water skis, bicycles, gym equipment etc), suitcases, travel bags, binoculars, camping gear, tableware (dishes, dinner service, glasses, kitchen utensils, pans, cutlery, etc), linen, curtains, bedding, clothing and shoes (for all residents including children).

Update your household inventory list or other list of assets on a regular basis.