What is a Sum Insured and why is it important?
Sum Insured might seem a confusing term at first, but it’s really easy to understand and can be the difference between having the right amount of cover and being underinsured. We know that many insureds don’t have enough insurance cover, leaving them over exposed to a wide range of risks.
Just imagine how you would feel if your home or commercial property burnt to the ground and you were only insured for $500,000, but it’s going to cost you $1,000,000 to replace the building and contents. That’s what underinsured means and where the term Sums Insured becomes important.
What does Sums Insured really mean?
Most insurance policies pay a policyholder (or carry out the repair works) up to a set financial limit. A Sum Insured is the maximum amount of money your insurance provider is willing to pay on a claim or the maximum value of your policy. Choosing the right Sum Insured for your insurance policy is important. Should the worst happen and you have undervalued your assets, you may not have enough financial capacity to rebuild or replace everything. Web calculators that reference current building and replacement costs play an important part in helping you decide the sum-insured. You can access these Insurance Calculators on our website here.
Ensuring that your Sums Insured are always accurate
The only way to make sure that your Sums Insured are accurate is to regularly have all your business and personal assets valued and use these valuations to make the relevant changes to your policies. If you don’t keep your Sums Insured up to date, there’s something called the co-insurance clause that can make matters even worse. This clause comes into play if you make a claim, but when the Sum Insured is less than the actual replacement value. For most property insurance policies, the Sum Insured must be at least 80% of the actual replacement value and if it’s less than this value, you will only receive 50% of the amount you are claiming.
This is a penalty that applies to business or personal assets that are underinsured. In real terms, this means that if your building costs $1,000,000 to replace, your Sums Insured must be at least 80% of this value, meaning you need to purchase insurance cover to the value of at least $800,000. Of course, the greater the Sums Insured, the higher the premiums, which is why some SMEs are underinsured.
What can happen if you’re underinsured
The problem arises when you make a claim, so if the replacement cost for your building is $1,000,000, but your Sums Insured is only $500,000, you have a problem. That’s because your insurance provider may decide that in this situation where your Sums Insured did not reach the 80% or $800,000 threshold, you are underinsured by $500,000 or 50% (in other words you are self-insured for 50% of the building’s $1,000,000 value). So your insurer activates the co-insurance clause and only pays you 50% of your Sums Insured, which is $ 250,000!
To avoid this happening to you, we recommend that you have these valuations performed at least every three years and that they are for replacement costs, not current market value taking into account supply issues or delays and rising costs of goods and services.
What can you do?
Working with an insurance adviser means they can highlight areas where you may be underinsured and work with you to have the appropriate insurance cover in place. This is just one of the areas we can assist and provide our expertise. To review your business and personal assets, talk to an insurance specialist today. Contact us here.