There are two crucial concepts in the insurance world that you should know before insuring any property: underinsurance and overinsurance.
Both terms refer to situations that are not at all desirable for those who take out a policy, so understanding them is crucial. At least if you want to protect your home and property properly.
In this article we explain what underinsurance and overinsurance are and how you can avoid them when taking out home insurance or any other type of insurance.
What is underinsurance?
Firstly, underinsurance occurs when the insured value of a property is lower than its actual value. This means that, in the event of a loss, the indemnity received will not fully cover the value of the property, which can lead to financial losses for the insured. Of course, no one wants to find themselves in a situation of underinsurance.
So that you can understand it better, imagine that you have a house with an insured content of 20,000 euros, but really what is in it is worth 40,000 euros. If they break in one day and steal 5,000 euros in value of certain goods, the company will not pay you that, but will pay you half, applying the proportional rule (having 40,000 euros but only 20,000 euros in the contract, you will be compensated with 50%).
The proportional underinsurance rule
You should know that the vast majority of policies include an underinsurance clause that applies the so-called proportionality rule that we have just mentioned. When this occurs, the indemnity paid by the company is calculated in proportion to the insured value and the actual value of the property:
(Sum insured x Value of the damage suffered) / Actual value of the property
To give another example: you have a house valued at 150,000 euros but you insure it for a sum of 100,000 euros. If one day a loss causes damage to the house worth 50,000 euros, your insurance company will apply the proportional rule to calculate the indemnity. In this case, you will only receive 33,333 euros, since the sum insured is only two thirds of the actual value of the property.
What is coinsurance?
On the other hand, we call overinsurance the situation in which the insured value of a property is higher than its actual value. The insured is paying a higher premium than necessary because, if a loss were to occur, the indemnity would not exceed the actual value of the property. This is so because, by law, in an insurance contract there can be no enrichment, but simply a loss is covered.
Let’s give you an example: if your car is valued at 15,000 euros and you insure it for a sum of 25,000 euros, you are in a situation of overinsurance. Although you have paid a higher premium, if your vehicle were to suffer irreparable damage, the coverage would not exceed 15,000 euros, which is the actual value of the car. Although it may seem that you are better covered, the reality is that your insurance company will only indemnify you up to the actual value of the insured property, never more.
This happens a lot with mortgages and bank home insurance. Normally, they require us to insure our home for a value that they determine and much higher than the reconstruction value, which is the insurable concept. This only serves to pay them a higher premium.
By the way! You can check here which are the best home insurances 2024.
How to calculate the real value of your assets
You already know what overinsurance and underinsurance mean and now you are wondering how you can avoid falling into these situations when taking out a home insurance policy, aren’t you?
You can start with the most important thing: calculate the real value of your assets. To do this you should:
- Conduct a detailed inventory of the contents of the dwelling.
- Seek professional appraisal from an experienced appraiser.
- Review and update your policy regularly.
That is the ideal situation, but we know it is unrealistic. If you have normal furniture, you can consult your mediator, because depending on what they measure, this professional will know what are the usual averages that are insured.
Tips to avoid underinsurance and overinsurance
Do you want more tips? These are our recommendations, take them into account if you want to avoid overinsurance or underinsurance!
- Evaluate your coverage needs before purchasing home insurance. Not all policies are the same and some offer additional coverages that you may not even need.
- Choose a flexible policy, which allows you to adjust the sums insured according to variations in the value of your assets.
- Consider the cost of reconstruction and replacement. When insuring your home, be sure to include the cost of reconstruction, not just the market value. Also the replacement cost, which includes the expenses to restore your home to its original condition.
- Get advice from an insurance broker. There is no one with more knowledge and experience in the subject than an insurance broker, as is our case.
At PIB Group Iberia we can become your trusted brokerage and help you choose the most appropriate coverage according to your needs. We will prevent you from paying more than the bill and we will make sure that, in the event of a claim, you get the most favorable and fair compensation possible. Would you like to contact us?
