Informed consumers can avoid the underinsurance trap

Gari Dombo warns on underinsurance

Consumers only realise that they are underinsured when a loss occurs and their insurer does not pay the full cost, leaving them to foot the rest of the bill.

Yet “if consumers took the time to understand two rules they would save themselves a lot of confusion, heartache and unnecessary expense” says Gari Dombo, Managing Director, Alexander Forbes Insurance.

Firstly, and most simply, on All Risks and motor policies, if the sum insured is less than the replacement cost, un-repairable or lost property will be paid out at the value insured.

Secondly, and only slightly more difficult to understand, is that if buildings and contents are not insured for their full rebuilding or replacement price they are underinsured. They will not be paid out in full in the event of a loss since the condition of average will be applied.

For example, if the cost of rebuilding your property is R400 000 but it is insured for R350 000, you are in effect 12.5% underinsured. “If R40 000 damages happens to your roof, because you were underinsured by 12.5%, your insurer will apply the condition of average and reduce your payout by 12.5% - settling your roof claim for R35 000” says Dombo.

To avoid not being paid out in full Dombo advises consumers to:

• Insure contents and All Risks items for their full and current replacement cost by “annually evaluating furniture, white goods, applicances, jewellery, antiques, collector’s items and other valuables at their current replacement price” advises Dombo.

· Insure buildings for their full reconstruction costs at today’s building prices including; allowance for inflation to the end of the insurance year, escalation for building time, professional fees and demolition costs. In short “your policy should cover the all costs involved in rebuilding your property to its original dimensions and quality” explains Dombo.

When choosing an insurance product consumers should consider the level of cover offered and whether this in fact covers the risk that they want insured since often similar sounding covers can be dramatically different in detail.

Also, price alone is a bad guide to buying insurance. Instead, consumers “should be aware of the quality and content of the offering, fully understanding what they will get in return for their premiums” advises Dombo.

So, while you “might save some money by using a cheaper insurance product, if a loss occurs you could land in financial trouble - or lose a portion of your savings if you have not insured properly according to your needs” warns Dombo.

If consumers are not sure about their cover they should approach an insurance adviser. “After all money spent on cover that will not pay out is money wasted” concludes Dombo.