Blog Question on Penalty for Under Insurance is today’s question:

Hi Allan

I need your expert opinion on the above subject.

It relates to the Underinsurance Clause in Property policies and how it is applied in a loss (specifically losses above 5% of Total Asset Value).

As an example an insured owns Buildings $5,000,000, Contents $5,000,000 and Stock $1,000,000.

The insured decides he can sustain a loss of any sort to Contents and Stock and only elects to insure Buildings. A fire destroys 50% of total property. The question is 2 fold: • Will the insurer invoke the Under insurance Clause, as all property is not insured?

Or  is insured able to select what components of property they wish to insure (i.e.. noted as “Excluded” in the schedule of Total Asset Values) and not have these used in the calculation of a loss? My experience is the insured would be well under insured (in the above scenario) and the insurer would have the right to invoke the under insurance clause; however I’m told the insured can select what property they want to cover.

I look forward to hearing from you and any issues please let me know.

Kind Regards

Anthony [surname and email provided]

I replied:

What you have been advised is correct. If it is clearly shown on the Policy Schedule what is and is not covered, then it would not be reasonable for an insurer bring into play the value of any asset that they would never have to pay out a claim on.

With most modern day business packs and the ISR wordings negotiated by international and cluster group brokers, I note your company is a member of a cluster group, the cut of percentage where co-insurance  is tested is now 10%. Having said this you need to check this fo r the policy you are recommending.

The other point I would make is that there is clearly a sizeable risk to the Insured here by self insuring contents, which would include the removal of debris and perils such as theft and water damage!


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