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Underinsurance means that the property or business is not covered for the full replacement cost. The Building Sum Insured must be sufficient to cover the cost of demolition, removal of debris and submitting new planning applications before commencing the actual rebuilding of the property, including boundary walls, outbuildings, garages, sea walls, jetties, swimming pools and tennis courts. This amount is different from market value, which may also include land.
If the Building Sum Insured does not include the above, the policyholder could be out of pocket in the event of a claim. As an example, let’s say the full cost to rebuild your home is $1 million but the insurance policy is for $800,000, so 80 per cent of the value ($800,000/$1,000,000 = 80%). Many insureds think the insurance covers the first $800,000 and the homeowner the $200,000 above that, this is correct only in the event of a total loss and can prove to be a costly mistake to make. In reality the insurance company is providing insurance for 80% of the home value in partnership with the homeowner who provides self-insurance for the other 20%. Now imagine your home receives $100,000 claim. As the insurance policy is 80 per cent of the full replacement cost, the insurance company covers 80% of the repair cost, the other 20% is paid by the homeowner. So with this $100,000 claim the homeowner would only be eligible to receive $80,000 from the insurance company, leaving a shortfall of $20,000 the homeowner would have to cover.
Why take such a risk? The majority of insurance claims are partial losses for damage to a section of the property. Many insureds don’t realize that an insurance claim will be settled on a proportional basis, based on the amount of overall coverage they have, which may leave them responsible for the remaining amount.
In addition it is important to understand the distinction between home and contents insurance: the first covers the physical building that is your home, including the walls, floor and roof etc. Contents insurance provides coverage for the items inside your home, such as furnishings, electronics and appliances.
Renovations and new items such as jewellery or artwork can require an increase in coverage to provide accurate protection. Many policyholders buy insurance on a building and contents basis, and don’t think to re-evaluate the coverage over time. This is common and can, unfortunately, cause serious financial distress in the event of a claim if not addressed.
In addition to notifying your insurance company when you add or change something significant to your policy, it is good practice to review your coverage with your insurance professional on an annual basis. Simply contact the Argus Customer Service number at 298-0888 to discuss your home and contents coverage
Commercial business owners can also be underinsured for business property or business interruption. The consequences of underinsurance for commercial clients are the same as for home owners and can cost a business a considerable amount of money.
For more information on Argus, including appropriate levels of cover on commercial property, home or contents insurance, please visit www.argus.bm or call 298-0888.