House Contents: Be warned, Underinsurance penalties can be severe

Recent statistics revealed that South Africans with Household Contents insurance are Underinsured by a whopping 77% and even more alarming is that extent of this Underinsurance is  61%!

So what is Underinsurance and why do insurers insert this penalty in their policy contracts?

Underinsurance Defined

Insurers add a clause to their contracts which stipulates that at claim stage you will be penalised proportionately to the extent your Household Contents sum insured does not represent the full New Replacement Value (VAT inclusive). For instance, your House Contents sum insured is stated as R250 000 and you suffer a theft loss of  R100 000. The insurers conduct a value at risk exercise, based on the full New Replacement Value (VAT inclusive) of your personal assets (excluding motor car and items insured under All Risks), and arrive at a sum insured of R500 000. You would be 50% “Underinsured” as R250 000 expressed as a percentage of R500 000 is 50%. Your claim payment would only be R50 000 as opposed to the actual R100 000 financial loss suffered.

Why do insurers penalise you?

All policyholders who insure their House Contents, pay premiums based on their sums insured, into a Household Contents insurance pool out of which insurers pay bona fide claims. If you elect to only insure 50% of your true sum insured your insurer will only pay 50% of your loss. This is equitable since you would then have accepted to self insure 50% of your risk and on this basis would have paid a lesser premium into the insurance pool

The Problem

Most people don’t intentionally Underinsure. Underinsurance normally is a result of policyholders basing their sum insured on depreciated values. As mentioned above, insurers contractually compel you to insure for the full New Replacement Value VAT inclusive. The emphasis here is New value and not the Old (depreciated) value. Of course, the other challenge is to ensure your values remain correct once you have correctly assessed the new replacement value of all your assets. Inflationary pressures and new asset acquisition must be factored in to ensure that your sum insured remains adequate. Another frequent reason for underinsurance is the under estimation of the new replacement value of jewellery, antiques, art, collectibles and the like

The Solution

The solution is rather simple: An up to date asset inventory of all your Household Contents based on New Replacement Value, VAT inclusive. While the solution is simple, most people don’t relish the job of ascertaining values, remembering that Contents includes all property in your residence – from small ticket items like teaspoons right through to high end clothing items, jewellery, electronic items etc. Chadwicks recommends the appointment of a proficient broker who has access to reputable companies who undertake insurance valuations on your behalf to insure you don’t fall foul of underinsurance. Chadwicks also recommends you slightly overinsure given that the premium sacrifice is usually small in comparison to the stiff financial penalties imposed as a result of underinsurance

Statistics courtesy of The Weekend Argus 28 February 2009