Personal Insurance: The devil's in the detail

When buying insurance all possible circumstances likely to lead to loss should be anticipated in the detail of the policy. People who fail to examine, understand and, if necessary, alter the detail of their policies might be unwittingly underinsured.

Says Gari Dombo, Managing Director, Alexander Forbes, Personal Services, "Too often people buy an off-the-shelf insurance product believing that, say, their car is now ensured".

On examination of the detail of the product, however, not all insurance products are the same and many may not suit your needs.

"For example", explains Dombo, "Some car insurance policies cover your vehicle regardless of the driver. Other policies only cover your vehicle in the event that you or a designated driver is driving. Too many people only find out after their first accident that they were not, after all, covered for everything they'd thought."

A critical concept not understood by most purchasers of insurance is the 'condition of average'.

For example, you insure goods to the value of, say, R500 000 for only half their value, namely, 250 000. You then sustain R100 000's worth of damage. Despite having ensured to the value of R250 000, since this was only half the value of all the goods, you are only entitled to half the payout on your R100 000 loss, that is, R50 0000. The remaining R50 000 youd have to cover yourself."

Dombo explains that, This is why in cases of under-insurance, insurance companies often only pay out a fraction of what policy holders expected to receive. Whenever the condition of average is applied to an insurance contract it is essential that the sum insured represents the full replacement value.

"The importance of ensuring that the detail of your policy reflects the reality of your situation can't be over emphasised", stresses Dombo. 

Another common example worth examining, continues Dombo, is general household policies. For example, "Are you still covered if you rent rooms in your house to other people? Also, if one of them burns your house down, will your general household policy cover this?"

In a case like this, "The rule of 'insurable interest' applies, that is, you can only ensure what you own."

Using the example of the tenants in your house, "Your insurance policy should cover the structure of your house as well as any liability that you might incur in the event your tenants were injured or did damaged your house. Each tenant on the other hand should be responsible for their own content cover."

Another example would be a 32 year old PhD student living in digs doing occasional research work for which he was paid.

Dombo elaborates, "A 19 year old undergrad living in digs may remain under his parents insurance. At 32, with a partial income, or insurable interest of his own, he should be looking at joint cover with his parents. Such cover would detail what his parents insurance still covered, along with what his own partial insurance covered."

Interestingly, "Not all companies automatically accept that a student living in residence or digs automatically falls under his or her parents household cover. Again, it is important to examine the detail of your insurance to make sure that your kids at university are considered as living under your own roof."

Dombo concludes that, "While knowing the detail of your policies is important, it is equally important to continuously disclose changes in your lifestyle, status and possessions. Insurance companies need this information to update your policies to reflect the detail of your changed circumstances and avoid underinsurance."