When it comes to working out insurance claims, insurers rely on averages.
Consider your commercial property – imagine R1.5 million is the value you have chosen to insure your equipment and office supplies in your insurance policy, but the true replacement cost comes to R3 million. If a fire, storm damage or crime causes damage to your contents, you are likely to come up short when you claim – by at least half.
The principle of averages applies: essentially, the percentage by which you are underinsured will be applied to your claim, reducing it. For example, if you are 20% underinsured, only 80% of your claim will be paid. It doesn’t work the same way for overinsurance (you won’t get a 20% higher payout) but underinsurance can be just as financially devastating when it comes to your building insurance, protecting the physical structure of your commercial space.
The value of your property and the items inside will fluctuate and the way these are determined will differ, depending on your policy. Insurers also calculate value in different ways, so it’s important to understand how your cover works. They might look at square meterage, the cost of your architect, municipal fees or demolition costs. It is recommended that a commercial property be re-evaluated every three years to ensure the insured value keeps pace with the factors that go into its true replacement cost.
Insurers work annually with inflation to determine the value of commercial buildings. So if, for example, cosmetic changes were made to your property, these should be factored into your cover, with inflation taken into consideration too. This will prevent any shortfalls, and remember that VAT needs to be accounted for in the valuation as well.
How uncertainty has played a role in underinsurance
The emotional uncertainty around lockdown, particularly at the higher levels, and the financial impact it has had on household budgets, are stressful factors to face. Business owners were not sure when they would open (some are running on lower capacity or continue to work from home). This has had an impact on specified assets like cell phones, tablets and laptops, as well as vehicles.
Some clients downgraded from comprehensive cover for vehicles to third party, fire and theft, or third party alone. Big truck companies, for example, had many vehicles that didn’t move for months and insurers have rallied to support clients where possible, especially if mileage is low or down altogether. The decisions to reduce cover like this had a positive impact on budgets and were perhaps the best options at the time, but the festive season is right around the corner and economic activity is ramping up. This time of year is notorious for more claims to arise. So, it is important to revisit the cover levels to see if it is adequate for your possible exposure if there is a loss event.