When it comes to getting insurance cover, the process seems straightforward: call, get a quote, sign the documents, and voilà, you're comprehensively covered. Right? Not quite. Many people don't realise they might be underinsured.

Being underinsured can cause significant issues if you need to make a claim. Underinsurance means that when your insurer calculates the payout for your claim, they will use the "average clause" to settle the claim.

What is the Average Clause?

The average clause in an insurance policy requires you to bear a proportion of any loss if your assets are insured for less than their full replacement value. This proportion is determined by the amount your assets were underinsured, expressed as a percentage of their indemnity value at the time of the loss.

In simpler terms, if your asset is insured for less than its actual replacement cost, your insurer will only pay out a percentage of your claim.

Example 1: Underinsured Vehicle

Imagine Johny’s vehicle is worth R100,000, but to save on premiums, he insures it for R80,000. If he has a claim, the insurer will only settle 80% of the claim amount because Johny didn’t pay a premium for 100% of the vehicle’s value.

Example 2: Underinsured Property

Consider Rachel, who insures her building for R700,000 when its actual value is R1,000,000. If a part of her building burns down due to a left-on coffee machine and the damage amounts to R300,000, the insurer will only cover 70% of the claim, which equals R210,000.

It's important to note that average will not be applied to total losses. In cases where vehicles or properties are deemed uneconomical to repair, the insurer will only settle the sum insured.

How to Prevent Being Underinsured

To avoid the pitfalls of underinsurance, it's crucial to consider inflation and how it affects the value of your property year after year. While most homeowners' insurance policies are automatically adjusted to account for increases in building material costs, these adjustments may not always cover the actual cost of rebuilding your property or parts of it.

Here are some steps to ensure you're adequately insured:

Regular Reevaluation: Periodically reassess the value of your assets to ensure they are insured for their full replacement cost.

Adjust for Inflation: Make sure your policy adjustments reflect true inflation rates and rising costs of materials.

Consult with Your Broker: Regularly discuss your coverage needs with your insurance broker to stay updated on any necessary changes.

Ensure Your Protection

Are you worried that you might be underinsured? Don’t wait until it’s too late. Contact Mont Blanc Financial Services for a comprehensive portfolio review today. Protect your assets and your peace of mind by joining the Mont Blanc family. Our expert brokers will ensure you have the right cover for your needs. Contact us now at 0800 467 873. Don’t leave your protection to chance – ensure you’re comprehensively covered with Mont Blanc Financial Services.

Mont Blanc Financial Services - is an Authorised Financial Services Provider. FSP 8271