Mr. XYZ took up a comprehensive motor insurance cover on his brand new car which he got for N7,500,000.00. Since the insurance premium payable would be based on the value of the vehicle, he decided to reduce the value to N3,000,000.00 so that he would not have to pay so much in premium.
Some months after, his car was involved in a ghastly accident and the cost of repairs was about N2,500,000.00. In settling his loss, his insurance company, having weighed the amount he was claiming to the sum insured, opted to treat the claim on a Constructive Total Loss(CTL) basis. By this option, it means that the insurer decided that based on their records, the vehicle was beyond economic repairs. Mr. XYZ was offered the sum of N2,800,000.00 (after all deductibles) in settlement of the claim.
Mr. XYZ found himself in a fix. The amount he was offered was not even up to half of the value of the car but he couldn’t afford to repair the car himself. However, accepting his insurer’s offer would require that he forfeits the damaged car to them in line with the conditions of the insurance policy.
You obviously cannot eat you cake and have it back.
What is “Underinsurance”?
Underinsurance is the reduction of the actual value of a property for the purpose of insurance And often times it is a deliberate act by the insured in order to reduce what would have been payable in terms of insurance premium. Another factor that could result in underinsurance is inflation being that the rise in the general praise level would have rendered an initial sum insured inadequate. Underinsurance means that the policy holder did not contribute adequately for the risk introduced into the insurance pool and the insurer has been placed in a disadvantaged position.
How is “Underinsurance” treated in the event of a loss?
The method of treating underinsurance cases depends on the type of the insurance policy under consideration.
1. Motor insurance policy. – Despite that motor insurance policy is an “agreed-value” policy (that is the value of the subject matter had been agreed upon at the inception of the cover), the scenario painted above is a clear case of underinsurance. The operative clause here is the “Constructive Total Loss” clause which is contained in every motor insurance policy. This clause states that when the cost of repairs is more than a predetermined percentage (usually between 65% and 75%) of the sum insured, the claim would be treated as if it was a total loss claim. The vehicle becomes transferable to the insurer as their salvage.
2. Non-Motor Insurance Policies – By “non-motor”, we mean other classes of insurance apart from motor insurance. The operative clause here is the “Average Clause” or “Pro-rata Condition of Average”. This clause states that where the sum insured is lesser than the market value of the property at the time of claim, the amount claimed would be adjusted based on the proportion the sum insured bears to the market value of the property. A prominent form of this clause is the “85% Condition of Average Clause”. This clause states that when the sum insured is less than 85% of the current market value of the subject matter, average would apply”. The application of average is to reduce the payout to the insured in settlement of the claim.
How to guard against the effect of “Underinsurance”.
- Insure for the full/market value of your property. Especially in the case of motor insurance, this is the only option available.
- Request for the introduction of specific clauses like the Reinstatement Value Condition (This clause makes the sum insured the bases of indemnity) or the Escalator Clause (this clause helps protect the policy against the effect of inflation by extending the insurer’s liability up to a certain percentage above the sum insured)
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