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Underinsurance and Declaration of Material Facts

Annette Baguley, scheme account executive at the Real Insurance Group Ltd talks about Underinsurance and the importance of declaring Material facts to insurers.

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Insurance can be a “minefield” for sign-makers and printers

When it comes to Insurance it can be a bit of a minefield so getting the facts and figures correct right from the start is vitally important. If these are wrong this could seriously affect settlement in the event of a claim or indeed whether a claim is settled at all.

Underinsurance

If the sums insured on your policy are incorrect and the figures you have declared to Insurers are much lower than they should be, then the Average Clause will apply!

This means if you are underinsured, your insurers will work out the loss against the amount you are underinsured and the full value of the item. They will then pay a proportionate amount of the claim depending upon how much you are underinsured. This will mean you must then bear a proportion of the loss yourself.

In addition, the policy excess will be taken off after the average clause has been applied thus reducing the settlement further as insurers will not apply the excess to the total before they have proportioned out who will bear the loss.

Remember, if your sums insured are right in the first place, this won’t happen!   

So how do you work out your sums insured?

There are four options for the basis of settlement of a claim which are:-

Reinstatement

The current practice is to insure material goods on a ‘reinstatement’ basis or ‘new for old’ basis. This means Insurers will settle your claim by replacing the same item as new or with an equal item but without bettering it.

This means even though the printer you own is 5 years old and only worth half of the new value, you will still need to Insure it for its ‘new value’ if the policy is based on a ‘reinstatement basis’ as Insurers will pay out on this basis.        

Indemnity

This means that an Insurer will indemnify you, ‘put you back in the same financial position’ as you were before the event occurred.

i.e. The forklift truck you have is insured for cover inside your business premises is stolen during a break in and it is Insured on an indemnity basis.

Insurers will give you the existing value of the truck back and no more. They will indemnify you for the actual value of the forklift, basically giving you back what you had prior to the loss.  

Agreed value, and this is not as common, is when you agree a value with the Insurer due to the market value of the asset being difficult to establish.

First loss. Where a total loss is thought unlikely, the sum insured may be set at a lower amount than the full value. This is recommended only where there are high values or a large spread of risk.

For further in formation in respect of how the average calculations are applied please ask your broker or refer to your policy wording as there should be a calculation table or example supplied but remember you can avoid this clause if your sums insured are correct.                          

Declaration of Material Facts

So, what do we mean by this?

It is a requirement of the client or insured person to declare to the Insurer any material fact which could influence an insurer in respect of premium or acceptance of cover for a risk.

Facts such as previous bankruptcies, criminal offences, prosecutions or special terms imposed on insurances are all classed as material facts. In additional if any of your insurances have been cancelled or refused renewal by insurers this must also be disclosed.

Material facts are not just serious facts, they are facts which could affect the risk such as security measures at premises, type of building construction, being situated next to a hazardous premises  such as a petrol station or being located in an isolated area or close to a water course, lake or river.

With this information an insurer is able to determine whether the risk is acceptable to them, if a premium loading is required to accept the risk and/or if any special terms or higher excesses are to be applied.

So, what happens if you don’t disclose?

Well, firstly Insurers have the right to void the policy from inception. In effect this means they would be entitled to act as if the policy never existed and to seek recovery of all claims already paid out although they would be obliged to repay the premium to the client in most cases.

The actions Insurers would take would depend upon each separate case however DO NOT take the chance, make sure you declare all material facts.

This does not just apply at inception of the policy, this would apply to changes in the risk throughout the policy term. For example if you decided to remove or change an alarm system, replace the windows or doors, expand into the unit next door...these are all material facts which must be disclosed.

Insurers will then endorse the policy to note acceptance of these changes and if necessary charge an additional premium. The facts have been disclosed therefore in the event of a claim Insurers are fully aware of the risk they are protecting .

So, to recap, declare any material facts which could affect your policy. If in doubt mention them and your Broker will advise whether they are relevant or not and secondly it is important to get the sums insured as near as possible to their correct value. Err on the side of caution if necessary and go slightly higher rather than slightly lower and you will avoid this potential pitfall.


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