Question on Test for Under Insurance on a Business Pack Policy

bigstock-Questions-And-Answers-8042036The question today was:

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Good Morning Allan,

We would appreciate your interpretation as follows.

Refer attached Sunrise schedule with the sum insured & limit of liability clause a [cluster group] BPK wording.

Building Sum Insured/Declared Value (page x)                    $8,440,000

20% Extra Limit of Liability (page x+1)                                     $10,128,000

BPK Extensions of cover – A (page y)               “we do not pay more in the aggregate than the limit of liability shown”

Under-insurance (page y-1)

We are seeking clarification of the following:

Does this increase the Sum Insured/Declared Value by 20% therefore underinsurance applies to $10,128,000?

Does this increase only apply to Extensions of cover – A therefore underinsurance applies to $8,440,000?

We would appreciate your reply at your earliest convenience.

Feel free to call me on the number below if you wish to discuss further.

Kind Regards,

Paul [surname and email provided]

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Hi Paul

The simple answer is that the test for co-insurance is based on the lower figure, the one the client pays the premium on.

The 20% uplift is there to allow coverage for things like Removal of Debris and Extra Costs of Reinstatement and also a modest inflation factor should there be one between the start date of the policy and the date the building is actually reinstated. This figure needs to be higher than the declared value or traditional sum insured due to inflation.

The test for co-insurance is a “day one” test with the Insured expected to get this figure right.

The same goes with the 20% natural disaster uplift that some business pack policies now contain following a submission of a paper by LMI on behalf of your cluster group.  This, again, is the insurance industry showing a social conscience wishing to provide coverage to an insured, knowing that through the pressures of supply and demand the cost of rebuilding does go up after a natural catastrophe event.

With this benefit, the test for co-insurance under the policy you are referring to and most (not all) policies is the start date of the policy and, as such, the uplift is not designed to allow under insurance at the start date.

I hope this explains the situation.

Regards

Allan

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