Underinsurance is a frequently used term in insurance and often associated with ‘Average’ although the two should not be confused. The potential impact of underinsurance in the event of a claim should not be underestimated.
The following statistics published by Barrett Corp Harrington for 2007/11 indicate the extent of the problem:
• 85% of cases reviewed contained an element of underinsurance
• The average increase was in excess of 60%
What is underinsurance?
Underinsurance is the failure of the insured to set adequate sums insured or fully cover their potential losses. Examples include:
• Setting the Material Damage sum insured (Buildings, Contents, Machinery/Plant etc.) below the full cost of replacement
• Selecting a Business Interruption Indemnity Period that is too short for the time required for a business to fully recover
Insurance policies we will never pay more than the Sum Insured or Limit of Indemnity. If you insure your office contents for £25,000 and they are all damaged and they cost £50,000 to replace, an insurer will never pay more than the £25,000 sum insured.
It will therefore be appreciated that if we were dealing with a £50m building instead, the consequences of underinsurance would be catastrophic.
