Understanding the penalty for under insurance #2

Last week I posted an article on why insurers have a penalty for co-insurance.

I got this question following that post from someone who is not in the insurance industry but which comes up quite often after a claim.

“So you are saying that if a commercial insurance policy is for example 500k and a policy typically gives the Insured a 20% tolerance factor (to be under insured) , i.e. in this case 400k and the insured in fact pays hard earned funds to insure for say 380k, unknowingly not realising that they are underinsuring – they in fact at time of claim get paid zippo, nada, nothing by the insurance company?

If that is actually the case (and I haven’t misunderstood such), perhaps worth editing the blog with an example of dollars, re payout. I.e. similar to what I have put above.

I didn’t actually realise that was the case (not an issue in our case).

If my understanding of your blog post is correct, should insurers/ brokers not be insisting on valuation of properties every so many years with a commercial policy?

As it could be perceived that it is somewhat corrupt/ fraudulent to receive insurance policy funds/ broker fees for possibly multiple years on an insured sum and then the insurer not pay out at all on the commercial policy upon an insured event. I do understand that in the small print of the multi-page policy wording it would be stating such. I also understand your reasoning re such, particularly if not a full loss.

Does the same underinsurance clause not come in to play re home insurance policies? If not, why not?

I ask such as your blog header particularly mentions ‘commercial’ insurance policies and Kerry’s question pertained to ‘commercial risks’.

Is this a case of yet again, commercial getting impacted differently? I.e. a bit like a bank normally charges a higher interest rate for a commercial property loan, rather than a home property loan and no doubt council rates are charged at a higher premium etc.”