The Risk of Under-Insuring Your Assets
Often unintentionally, assets might be under-insured and we appreciate to address its consequences in following write-up.
When insuring your assets, it is important to understand the difference between market value and insurance value. Market values represent the value of your assets, which a potential buyer would be willing to pay.
Where as Insurance Valuations focus either at the new replacement value or at the indemnity value. The new replacement value represents the value (or cost required) for a new replacement of your damaged assets. Where as the indemnity value is the new replacement value less depreciation in terms of usage, wear and tear etc.
The concept of insurance based on replacement value is to repair or reinstate or replace the damaged asset with similar asset which is not better or broader than the asset insured when it was new. This method is called insurance on a reinstatement basis.
The concept of insurance based on indemnity value is to repair or reinstate or replace the damaged asset with a similar asset which is not better or broader than the asset insured at the time immediately prior to the loss, taking into consideration the age condition and remaining useful life of the asset. This method is called insurance on an indemnity basis.
Please check your sum insured in your policy and make sure, that you correctly state your sum insured either as the new replacement value or the indemnity value that will serve as the basis for the settlement of claims. Some insurance policies only allow you to declare the new replacement value as the Sum Insured.
In case of under-insurance, if assets were under-insured by 40%, the compensation would also be reduced by 40% correspondingly. This practice is known in the insurance industry as "average" and explained in below illustration and following formula.
ILLUSTRATION (example with 40% under-insurance)
FORMULA : Sum Insured x Loss Amount = Compensation
Insurance Value
EXAMPLE : 60,000 x 40,000 = 24,000
as above 100,000
If you have any doubts on your insurance value, we recommend you to consult a professional appraiser or just talk to us.
Thank you for your attention,
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