How do you avoid underinsurance? Being underinsured can happen without you even noticing, here’s how to protect yourself.
Avoiding underinsurance is vital for homeowners and business owners alike.
By logging all of your assets (even the smaller ones), equipment purchases, updating your listed company vehicles, renovations and additions to your workplace, you can make sure your policy is adequate.
What is being underinsured?
Being underinsured refers to the situation owners find themselves in where their insurance policy does not reflect the real value of the assets covered by said policy.
When you're dealing with business loss or need to rebuild your home, and you discover that the sum you have insured for isn't going to be enough to cover the costs you are faced with the harsh reality that you will have to cover any difference out of pocket and this can be financially devastating.
How does underinsurance happen?
As a business owner it is their responsibility to accurately estimate the cost of replacing the assets to be covered, even when working with a broker. If a business owner doesn’t know the accurate costing for replacement – whether total replacement in case of catastrophe or individual assets – then their estimates can be low. This results in a mismatch between listed values and actual replacement cost.
Home owners are in the same position, estimates need to be accurate in order for an insurance policy to be adequate. The cost of replacing individual aspects of a home, repairs, or totally rebuilding can vary wildly depending on a wide range of factors and the cover in place needs to be adequate for a house of your size and quality.
How do you avoid underinsurance?
By working with a trusted broker and ensuring your cost estimates are up to date and adequate at the time of forming the policy you can ensure that your insurance policy is enough to cover your assets.
Many brokers advise their clients to keep abreast of market changes and fluctuating values in order to avoid surprises when the real cost of asset replacement comes up.
Don’t rely purely on market values – these only take land values into account and don’t take into account the actual costs of rebuilding. These extra costs can include labour, inspections, and material cost fluctuations.
Businesses are recommended to undergo a thorough insurance coverage review every three to five years, though if their growth and development is rapid then a review is recommended more often.
Remember – book value does not equal real cost of replacement. The cost of replacement equipment is one thing, but take in to consideration the difference between replacing ten individual items in comparison to refitting the entire operation.
Newly acquired businesses are at risk of underinsurance when taking old policies as read. Older equipment may be listed as a certain book price but in reality, their modern equivalent would be more costly in the case of replacement.
Has covid affected underinsurance?
Yes. With material shortages being felt globally, supply chain interruption and fluctuating pricing can all effect the costs of replacement and rebuilding.
In a similar vein, businesses have seen issues with replacement stock taking longer to arrive and costing more on arrival.
Lifestyle purchases are on the rise as Kiwi’s focus on updating their daily drives, caravans, and recreational vehicles as well as home improvements like decks, hot tubs, and pools. All of these extensions need to be included in an insurance update as they radically change the value of a home.
The last thing you need when trying to deal with an accident or natural disaster is finding out that you are going to be out of pocket because you have ended up underinsured.
You can maintain adequate insurance by monitoring the market and ensuring that you update policies as the markets fluctuate but don’t forget to include increases in materials and labour in your estimates.
In order to protect yourself, make sure that changes in your home or business value are accurately updated in real time to avoid any nasty surprises.