Under insuring your guest house can have severe repercussions on any claim that is made. It is often the case that under insurance is not fully understood and therefore the consequences often not realized until a claim is made.
It is important to understand the mechanics of a claim to really understand under insurance;
When a claim is made an assessor will look at the claim from two perspectives – did the loss really happen and was there a case of underinsurance.
The below will explain some of the different scenarios:
Home Contents
For example: if you have insured your contents for R100, 000 and are claiming for the theft of a TV to the amount of R10, 000.
The assessor will look at the value of all your property, and estimate how much insurance you should have in place. In this example, he establishes the sum insured should be for R300, 000 to cover all your belongings. Resulting in underinsurance of some R200,000.
In this case, the insured was only paying for one third of the actual risk, therefore only one third of the claim would be paid – R3, 333.
A loss of nearly R7, 000
Building Insurance
In the case of partial loss
For example: a claim is received for partial damage totaling R500, 000 and the sum insured is R2, 000,000.
In this instance, the assessor works out that a total loss would have amounted to a re-building cost of R3, 000,000. The insured has not covered one third of the true risk.
In this case only two thirds of the repair costs would be paid – R333, 000.
A loss of nearly R170, 000
In the case of a total loss
For example: a claim is received for the total loss of a building for R2, 000,000 and the sum insured is R2, 500,000.
The full sum insured of R2, 000,000 would be paid.
A loss of R500, 000
All Risk
A piece of jewelry worth R10, 000 is stolen, but it was specified for a sum insured of R8,000.
In this case the insured has failed to cover R2, 000 of the risk, some 20%.
A claim would be paid for R8, 000 minus the 20%, resulting in R6, 400 being paid.
A loss of R3, 600.
Summary
The cost of replacing items changes often and sum insureds need to be reassessed in line with changes. Under insurance can have a severe impact on the successful settlement of claims and result in major financial hardship.
Whilst not wishing to over insure, it is essential that you have the correct cover in place.
Incompass would be delighted to discuss your insurance needs and provide you with a free quotation based upon your specific circumstances.
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