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Cover up! Underinsurance might leave you exposed

16 November 2018SBPR

There is nothing original in the statement that insurance is a grudge purchase.

This grudge is even more apparent at times when there are better things to spend one’s hard earned money on such as festive season gifts for the family or a well-earned summer holiday.

While many consumers accept that the grudge of paying insurance premiums is one that must inevitably be borne, they still try to lessen the extent of that grudge by providing inaccurate or incomplete information to their insurer so as to reduce the cost of their insurance premium. Sometimes this misinformation is intentionally or fraudulently provided – for example claiming to be the regular driver of a vehicle which is in fact driven most regularly by a driver with a higher risk profile, such as a driver under 25 years old or someone who has only recently acquired their driver’s license.

All too often this misinformation is unintentionally or unwittingly provided to the insurer because consumers do not understand the fundamental principles that govern the insurance contract between them and their insurers. An example of this that is all too often seen by this office is what is known in the industry as being under-insured. Even though underinsurance is exactly what it purports to be – taking out less insurance for items than they are actually worth and thereby under-insuring them – the concept remains one that is difficult for consumers to comprehend. This is primarily because consumers who underinsure their possessions act on the assumption that they, not the insurer, are assuming the risk of that underinsurance.

The Ombudsman for Short-Term Insurance, Deanne Wood, provides the following illustrative example: “Let’s say that the cost of replacing all of your household contents is around R500 000. This includes everything that is housed under your roof except for items affixed to your house such as built-in kitchen units and built-in cupboards. When your insurer asks you what it would cost you to replace all of your household contents you tally up those items that you would want to replace and leave off those items that you would not bother to replace if they were lost to you. Having made that assessment, you tell your insurer that your household contents are worth R250 000 instead of the actual value of R500 000. In other words, you believe that you are only insuring those possessions that you most value and that you will absorb the loss of the other possessions that you have not taken into account. However” explains Wood, “that is not how insurance actually works. If you do want to exclude certain items, such as an antique you inherited but would not want to replace, you must specifically notify your insurer that the item is to be excluded from cover.”

This is because an insurer considers itself to be on risk for the full value of the household contents unless it is otherwise informed. If consumers only insure the value of half their household contents, they will only be entitled to claim half the value of any loss that they suffer. Wood continues, “Assuming that you have a break-in and your television set is stolen. An insurer will usually send an assessor to value the loss and the remaining contents after your claim has been lodged. If you are 50% underinsured as described in the earlier example that I provided, and your television which is valued at R20 000, your insurer will only be on risk for 50% of the value of that television. Accordingly the insurer will only indemnify you for R10 000.”

“So”, concludes Wood “make sure that you take a proper inventory of all your possessions and that you provide an accurate replacement figure to your insurer when you are insuring your household contents. If you are unsure about how to accurately assess this value, ask your insurer to send an assessor to your home to perform this job for you. It may not be a service that is freely provided by your insurer but it is one that is worth paying for now rather than later when you discover that you are underinsured.”

Sidebar
Fact!
• If you are insured for half the value of your household contents, insurers are entitled to pay out half the value of any loss
• If you do want to exclude certain items, you must specifically notify your insurer that the item is to be excluded from cover
• Take a proper inventory of all your possessions and provide an accurate replacement figure to your insurer when you are    insuring your household contents
• If you are unsure about how to accurately assess the value, ask your insurer to send an assessor to your home to perform this job for you

About the Office of the Ombudsman for Short-Term Insurance:
The office of the Ombudsman for Short-Term Insurance is an independent organisation appointed to serve the interests of the insuring public and the short-term insurance industry. By applying the law and principles of fairness and equity, it resolves disputes between short-term insurance companies and their clients.

 

Quick Polls

QUESTION

Between 1918 and 2014, 32% of all of Lloyds of London’s insured losses were caused by flooding. With Climate change becoming a growing issue, is this a growing concern for insurers?

ANSWER

Yes, we have seen a significant increase in flood related losses
No, there will always be flood related losses. We are prepared for this.