Under-Insurance

Most of us who have insurance covers be it general covers like household insurance or life insurance covers would have taken the same due to pressure from the selling source. Very rarely do people think about the risks they are facing and take the appropriate coverage.

Those of us who have insurance does not know whether the Sum Insured or the amount we have taken as protection against a risk is adequate or not. Many of us will realise it only when we incur a claim and find out that we were under insured.

Under insurance arises when a party insures something for less than its actual value. In simple terms it means inadequate insurance coverage by the holder of a policy. Though it is usually seen in  property insurance like house, motor etc,  it is also seen in cases like health insurance where the individual suffering from any health condition does not have enough insurance to cover the health costs.

In the event of a claim, being under insured will negatively effect the policy holder since the amount that would be paid out by the insurance company would be lower than the claim amount. A simple example would make it clear. A residential property that was insured against fire for a Sum Insured of Rs 3 million  was destroyed during a fire. The actual value of the house was Rs 4 million. The insurance cover of Rs 3 million has an excess clause of  half a million , This excess clause means that the first half million  would not be paid by the insurance company. So in effect with an insurance coverage of Rs 3 million, the client would be getting only Rs 2.5 million for a property worth Rs 4 million.

There are lots of customers who insist on keeping the IDV of their motor cars far lower than the amount advised by the insurance company. This is done with the intention of reducing the premium amount that has to be paid. While under insurance may initially lower the premiums that any client has to pay because of the lower value of the property he has shown, during a claim this marginal benefit would be far exceeded by the loss he would incur and the resources he has to fund to reacquire or repair the said property.

Every insurance contract is drawn on the assumption that on the basis of good faith the customer or the client will disclose all facts pertaining to the property or his life as such. When property values or life values are reduced by the client knowingly, it is a breach of the above said contract. To under stand whether a property is under insured, we have to be aware of the replacement cost. Replacement cost is the cost that has to be incurred by the owner to replace the damaged items, or the cost incurred to treat a health condition back to normal. Once this replacement cost is clear, there is clarity with regard to the cover that has to be taken. While taking life insurance, inflation and future needs of the insured and his family also has to be addressed. Major expenses has to be charted and provisions have to be made. If not under insurance would come into play.

Under insurance may occur due to lack of awareness from the side of the clients or it may be due to deliberate choice taken by the insured to reduce the premium