Barker Insurance

Understanding Underinsurance - Are you adequately insured?


Insurance shouldn’t be a cost paid begrudgingly: when done right, it should provide comfort and peace of mind – an invaluable asset in these uncertain times.

But when cover is set up incorrectly and coverage is inadequate, underinsurance can cause uncertainty. stress, and even heartache.

Did you know that according to industry statistics, most properties are underinsured by more than 30%? All too often, individuals calculate the value of their household contents or building based on their desired insurance premium, rather than based on the value of the item(s) they want to be covered. In the event of a loss, the outcome of this kind of cover can be severe.

What is Underinsurance?

Underinsurance refers to cases where the amount of insurance coverage for any insured item – from Household Contents cover, to vehicles, to individually specified items like cellphones, or laptops – is lower than the cost necessary to replace the insured item or rebuild the building in the case of Buildings cover.

When Underinsurance has taken place, the insurance payout could be subject to the principle of "average". “Average” is applied because the premium that has been paid is for a lesser amount of cover and as such, a lesser amount is paid out for the claim.

What is Average?

In the Insurance industry, "average" is a calculation used to determine if a property or asset is underinsured, and by how much. If the insurance coverage is less than the actual value, then the claims pay-out for a loss will be reduced in proportion to the lower coverage amount.

For Example:

Jack insures his total household contents for a sum insured of R750,000. Jack has a burglary at home and R250,000 worth of household contents was stolen.

On inspection by a qualified assessor, Jack’s total household contents are actually valued at R1,000,000, and not R750,000. This means Jack is underinsured by 25%.

  • Loss = R250,000

  • Sum-Insured = R750,000

  • Actual Value = R1,000,000

  • Settlement based on Average: R250,000 x R750,000 / R1,000,000 = R187,500

As Jack is 25% under-insured, 25% is then deducted from the R250,000 he is claiming, and the resultant payout is R187,500. This leaves Jack having to cover the shortfall of R62,500.

Certain clients choose to pay less premium, and so carry a portion of the loss in the event of a claim. However, some clients prefer to pay a full premium, in order to receive a full payout in the event of a loss. This is why understanding your coverage, and having it underwritten well is so important.

Tips to avoid the pitfalls of underinsurance

  • Inventory Control: Chat with your Barker Consultant about creating an inventory list of your household contents. This will assist in determining the total replacement value of your household contents. Once your inventory list is complete, it can easily be maintained and updated on an annual basis or if/when you purchase additional assets.

  • Collectibles: Consider your collectibles. A collection of fine wines, whiskeys, art, jewelry, shoes, model cars, or stamps can add up to quite a substantial amount. As such, we advise that you take this into account when considering your household contents sum insured so that you are not left underinsured. If you choose to exclude your collectibles from your household contents, please notify your Barker Consultant as they can document this on your cover so that your collections won’t be taken into consideration in the event of a loss.

  • Renovations: Any renovations done to your home should be communicated to your Barker Consultant. This will enable us to include the value of your alterations to the Total Rebuild Value of your building, so you are not placed in a position where you are underinsured.

  • Power backup systems: Solar systems, inverters, generators, or backup battery systems can be very expensive additions to your home. If you’ve recently installed one, be sure to advise your Barker Consultant to add these to the value of your building.