By Herman Liebenberg – General Manager Insure City Insurance Brokers (Pty) Ltd

Underinsurance has been a contentious issue for many years, mostly since the insured only really understands the reality of it once they have had a claim and weren’t paid out the full insured value.

Understanding insured value:

Insured value, specifically on a building, should include the following as a true value of the property:

• Replacement value of having to build the property in full again from nothing
• The cost of demolition charges and securing the site
• Any municipal charges with regards to getting approval of plans and construction

It is a requirement and good practice to have a sworn valuation done on Sectional Title properties once every 3 years as prescribed by CSOS.  This should give the insured a true reflection of the rebuild value of the property as a whole.  The valuation should include all buildings, common property and specified all-risk items.

A standard inflationary increase of 10% is automatically applied at renewal to avoid a Body Corporate being underinsured, based on the last value received on the valuation.  The insured can decide to amend the increase percentage but should keep in mind that not increasing at all, could lead to underinsurance.

Understanding underinsurance:

Insurance premiums are calculated based on the insured value supplied by the insured to the insurers.

Insurers calculate premiums based on the replacement value, meaning they apply their rates based on what they can expect a claim (upon occurrence) to amount to, and prepare for it accordingly.

Example:

You insure a building to the value of R1 000 000.00. The insurer accepts your insured value to be accurate and allocates a premium to that value based on risk and the probability that a claim would occur for the full replacement value.

As part of this example, let us assume your premium is R500.00 per month. Your insurer has weighed their risk and allocated a premium based on the replacement value of R1 000 000.00.

Worse-case scenario happens, and you have a total loss fire claim amounting to R400 000.00. 

Upon assessing the damage and doing a survey of the value of the overall building, the assessor finds that your building should have been insured for R1 500 000.00. 

From an insurance point of view, you have contributed only two thirds of the actual premium required to insure the building in full. If the insurer was aware of the true value, they would have charged a slightly higher premium, as they have now suffered premium prejudice. The only way to rectify this would be to settle your claim proportionately.

Settling proportionately and how it’s calculated:

Since, per the above example, you as the insured only contributed premiums to two thirds of the replacement value, the insurer will only settle two thirds of the claim.  Settlement is calculated as follows:

• Insured Value: R1 000 000.00
• True replacement value: R1 500 000.00
• Claim amount: R400 000.00

Proportionate Value = Insured Amount / True Value

(R1 000 000 / R1 500 000) x 100 = 66.66%

Settlement Amount = Claim Amount x Proportionate value

R400 000 x 0.6666% = R266 640.00

In this instance you will only receive 66.66% (R266 640.00) of the R400 000.00 claim.

In conclusion:

It is extremely important that the broker and insurer are always updated on any value changes affecting the insured value of your property.

It is also extremely important that the value provided by the insured is a true reflection of the building to avoid any claims being settled proportionately.  Make sure the value of your property is correctly and professionally assessed by a sworn valuer at the very least every 3 years.  

Also, be wary of not accepting the 10% inflationary adjustment recommended by your broker and insurer at renewal as this could lead to underinsurance.