The one thing about any insurance is that it’s got to be accurate. The devil really is in the detail and when it comes to your commercial insurance it’s no different. Make sure that your assets are insured correctly. Don’t take a chance and “guestimate” because it could cost you a fortune if your insurer decides to apply the dreaded “average clause” at claim stage.
So what is the “average” clause?
Basically, it’s a clause in your policy which says if you are under insured you are liable for a proportion of the loss. If you are 50% under insured, then expect your insurer to only pay 50% of your claim.
Here is an example to better illustrate what I am talking about.
John owns a retail paint outlet. At any given stage he has around R500 000 worth of stock on his premises (well that’s what he assumes). Frank, John’s insurance broker has been nagging John for ages to double check his stock values and give him an accurate number so his commercial insurance schedule can be updated. But, like most small-to-medium sized businesses, John has a million things on his mind and spending time doing a proper stock take for insurance purposes just seems like too much hard work.
One Sunday afternoon Jose the guy who owns the Pizza joint next to John’s paint shop gives him a call and tells him to get down to the shop, like pronto!
The shop is on fire!
John races down to the shop but can doing nothing while the flames engulf his shop and as the sirens of the fire department trucks get closer, John knows he has suffered a total loss and could be in serious trouble.
Now the panic sets in. “Was I insured correctly?”
That afternoon John phones Frank his insurance broker and breaks the bad news to him. Claim forms go into the insurer on Monday morning and to cut a long story short it’s determined that John was horribly under insured.
His insurer has actually decided to apply “average” when finalizing the claim and this is how it all plays out.
It’s deemed that John was carrying around R 1000 000 in stock. Under the fire section of his policy, John’ s stock was insured for R500 000. You agree with me that R500 000 is 50% of R1000 000 right?
So because John is 50% under insured, the insurer is only going to pay 50% of the claim (but not the correct sum insured of R1000 000, rather the actual value in the policy contract at the time of loss – R500 000)
And if you’ve followed me up to now, you’ve worked out that 50% of R500 000 is R250 000. Ouch.
Had John simply taken the time to make sure his stock was insured correctly he wouldn’t be R750 000 down. He had a R1000 000 in stock and now he gets a pay-out of R250 000. Hard lesson to learn!
If your insurer finds you are under insured expect them to apply average.
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Until next time.
The InsuranceFundi Team