‘Under-insruance’ is the act of not declaring the full value of the risk for which cover is being sought. When you under-insure a risk, it’s usually with the intention of paying less premium than would be rightfully due to the insurance company.
As you can imagine, under-insuring a risk isn’t a wise thing to do. It can lead to serious repercussions in the event of an incident that gives rise to a claim.
Example
Say there’s been a theft at a motor spare-parts shop that holds a stock of Ksh. 10,000,000/-. The shop owner decides to declare a value of only Ksh. 6,000,000/-, which is 60 per cent of the actual value. During a break-in at night, parts worth Ksh. 4,000,000/- are stolen and the insured lodges a claim to the insurance company for that amount.
The company sends an investigator to the scene to verify the authenticity of the claim. These investigators are known as claims – or loss – adjusters. They are experts at determining the monetary value of a loss by using some very clever techniques at their disposal, including the reconciliation of purchase and sales records.
Now, when the loss adjuster reports to the insurance company that the actual value of the goods in stock was Ksh. 10,000,000/-, the company immediately assumes that since the declared value of the insured items was 60 per cent of their actual value, then the spare parts shop had automatically taken 40 per cent of the risk on itself, thereby rendering itself liable for 40 per cent of any loss incurred.
The insurance company will look at the claim of Ksh. 4,000,000/- and pay just Ksh. 2,400,000/-, this being its 60 per cent share. The insured therefore ends up losing Ksh. 1,600,000/-, which would probably be a lot more than the ‘premium saving’ generated due to under-insurance caused by the under-valuation.
Our advice
In view of the above example, we always advise clients to not only declare the correct value of the items being insured, but also to maintain accurate and readily accessible records of all stocks, sales and purchases, so that the loss adjusters may quickly and confidently approve claims and the insured may resume business with minimal loss of time.
If you’ve got any other questions about under-insurance – or anything else – please don’t hesitate to get in touch and one of our in-house insurance experts will offer you the correct guidance.