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An insight on Under-insurance

An insight on Under-insurance 03 Apr, 2018

What is under-insurance? For properties that are of high value it is recommended that evaluation of your property is done by a professional valuation firm before values are fixed.

What is under-insurance?

For properties that are of high value it is recommended that evaluation of your property is done by a professional valuation firm before values are fixed. This is to ensure that you are insuring the correct value of your building. When this does not happen, there is a risk that you are either under-insured or over-insured.. If you are over insured, you cannot be at benefit of your policy and on the contrary you lose out by paying additional premium due to high values insured. But if you under-insure, you will not be reimbursed to the full value of damages incurred.

Effect of Under-insurance

Assuming that you have declared a lower value than the actual value of your property, you are paying the premium for the lower value, that is, you are contributing premium less than thel premium that you should have if you had insured the correct value of your property.


Application of average

At the time of a claim if your property is under-insured, the insurer can reduce your claim pay out in proportion to the amount under-insured.

An example:

Mr X has taken home insurance and the following items are insured: Contents value: AED 125,000

Unfortunately, there happens to be fire damage to the contents worth AED 35,000/-

The insurance company of Mr X assesses the value of the contents and finds that the actual value of the contents in Mr X’s villa values to AED 180,000.

As we see Mr X has clearly under-insured the contents value by AED 55,000.

Claim payout will be proportioned as follows:

Payout = 125,000 * 35,000 / 180,000
= 24,305.55

So, Mr X will receive only AED 24,305 against his claimed amount of AED 35,000.

Basis of claims settlement under Property Insurance:

There are three basis of settlement:

The application of underinsurance depends on whether your policy specifies settlement of your claim on an indemnity basis (compensation for the actual damages) or on a reinstatement/replacement basis (new for old). In the latter case, it is necessary that the values declared for insurance represent the new reinstatement/replacement values for property at risk which may be substantially higher than the depreciated value.

How can you avoid being under-insured?

  • Understand the basis on which you policy requires you to declare the values
  • Ensure that you do not under-declare the value of any asset that you are looking to insure
  • Replacement values of fixed assets change over time
  • Market value is not always the correct value for insurance.
  • Consider other costs such as cost of transportation (in case your asset needs to be imported), cost for removing debris when the building etc.
  • Project for the future. Always insure your property keeping in mind the time required for reconstruction of your property when it is damaged in entirety. If it takes three years to rebuild, you must insure your property for a value that will be realistic at the end of third year.
  • Appoint an expert valuator to get a realistic estimate of the true replacement value of your insurable assets

Your home is a valuable asset; therefore make sure it is properly insured. It is advisable to declare all facts which may materially affect the risk evaluation of your property to your insurance company truthfully, and be specific as to what you want covered.

Also, please remember that valuations can change, for example, your personal possessions like jewellery. It is important to inform your insurer, either at the time of renewal, or whenever you become aware, of any changes to the value of your property, contents or personal possessions.

There are some high end policies which will automatically increase your Sum Insured every year by some percentage (usually 3%) based on the inflation index. But, for insurers which don’t do this, you must be on toes.

As always, please get in touch with our representatives present at our office or give us a call @800-GARGASH for any insurance related queries.