18 May 2016

Avoid Underinsurance

Avoid underinsurance_Home Insurance

Ever felt that buying the right insurance amount is like looking into the crystal ball?

It doesn't have to be.

Take home contents insurance. If you have spent a good $80,000 on interior design and another $30,000 on furniture, you should look for a plan which covers renovations and home contents for the same amount or more especially if you wish to cover your valuables and personal belongings.

This is because some insurance policies work on an average clause basis, and would pro-rate the claims payout if you are underinsured. Underinsurance occurs when the replacement cost to restore your home to a like quality is more than the sum insured.

The following demonstrates your share of insurance if you have chosen to underinsure yourself compared to the replacement cost of your home.

Sum Insured (The amount you choose to protect your home for)
Home contents - $15,000
Renovations - $60,000

Replacement Cost (The insurer will look at your items listed in your policy and evaluate its value at time of loss)
Home contents - $30,000
Renovations - $80,000

As your home is underinsured at the time of the loss, your share of insurance is
Home contents - ($30,000 minus $15,000) divided by $30,000 = 50%
Renovations - ($80,000 minus $60,000) divided by $80,000 = 25%

The insurer will then pro-rate your claims accordingly. As an illustration:
A pot left over-boiled led to a kitchen fire one day. Several of your electrical appliances including your Mielé fridge and part of the custom-made cabinets and side walls were all damaged.

Actual Loss (Value of items that are damaged/loss)
Home contents - Mielé fridge and damaged electrical appliances = $7,000
Renovations - part of the custom-made cabinets = $15,000

Insurer will pay
Loss to home contents - 50% of $7,000 = $3,500
Loss to renovations - 75% of $15,000 = $11,250

As the walls constitute part of the building structure, the reinstatement cost will have to be claimed from your fire insurance policy.