Underinsurance warning for South Africans
Many South African policyholders are underinsured, which poses potential risks that may haunt them in the future.
Jean-Paul Rudd from Adams and Adams said that underinsurance occurs when an object is insured for less than it is worth.
Rudd said that underinsurance allows for the principle of average, where insurers reduce their liability proportionality to the percentage by which an object is underinsured.
The idea is to ensure that policyholders disclose the true value of their insured objects. In other words, policyholders will be punished for trying to reduce their insurance premium by misrepresenting the true value of their insured objects.
Rudd said that underinsurance is best illustrated in examples.
Mr X insures his holiday home for R2 million, but its actual replacement value is R3 million.
- If his home is damaged in a flood, the insurance company will send an adjuster to evaluate the damage and determine the amount for his claim.
- If the adjuster states that the cost of the damage is R1.5 million, the average principle is applied.
- Mr X will thus receive a percentage of his claim based on the ratio of his coverage to the actual value of the home.
- He will thus only receive two-thirds of his R1.5 million claim, totalling R1 million.
Ms Y takes out public liability insurance for her business with coverage of R1 million.
- If a client slips on a wet floor and sues Ms Y for R1.5 million, the average principle may be used.
- In this case, she would only receive a percentage of her claims based on the ratio of her coverage to the amount of the lawsuit.
- In this example, she may only get two-thirds of her coverage limit, which is R666 thousand. She could thus be responsible for paying the over R800 thousand remaining.
Rudd said that the examples above show why it is important for policyholders to regularly check and update their insurance coverage to avoid having their claims being proportionally reduced due to underinsurance.
On a positive note, policyholders who have suffered a loss due to the application of the average principle may have a claim against their insurers.
Insurance brokers have a duty of care to their clients and must provide relevant advice to ensure that their clients choose the appropriate insurance coverage for their needs.
If brokers fail to properly assess the value of a policyholder’s assets or do not recommend the best insurance coverage – resulting in the insured being underinsured – policyholders can have a claim of professional negligence against the brokers.
Read: Why you should always read the fine print on your insurance in South Africa
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