There is two crucial concepts in the insurance world you should know before insuring any property: underinsurance and overinsurance.
Both terms refer to undesirable situations for the policy holder, that's why 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 a policy. household insurance or otherwise.
What is underinsurance?
Firstly, underinsurance occurs when the insured value of an asset is less than the actual value of the asset.. This means that, in the event of a claim, the compensation received will not fully cover the value of the property, which may lead to financial loss to 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 home with an insured content of 20,000 euros, but what is in it is really worth 40,000 euros. If they break in one day and steal 5,000 euros worth of certain goods, the company will not pay you that, but will pay you half, applying the proportional rule (as you have 40,000 euros but only 20,000 euros in the contract, you will be compensated with the 50%).
The proportional underinsurance rule
You should be aware that the vast majority of policies include a underinsurance clause applying the so-called proportionality rule mentioned above. When this occurs, the compensation 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 goods
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 claim causes damage to the house worth €50,000, your insurance company will apply the proportional rule to calculate the compensation. In this case, you will only receive 33,333 euros, as the sum insured is only two thirds of the actual value of the property.
What is overinsurance?
On the other hand, overinsurance is the situation where the insured value of an asset is higher than its actual value.. The insured is paying a higher premium than necessary because, should a claim occur, the compensation would not exceed the real value of the asset. This is 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 cover would not exceed 15,000 euros, which is the real value of the car. Although it may seem that you are better covered, the reality is that your insurance company will only compensate 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 insurance 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 home insurance, aren't you?
You can start with the most important: calculate the real value of your assets. To do this you should:
- Carrying out a detailed inventory of the contents of the dwelling.
- Search for the professional assessment of an experienced expert.
- Review and update your policy on a regular basis.
This is the ideal situation, but we know that 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 for avoiding underinsurance and overinsurance
Do you want more tips? Here are our recommendations, take them into account if you want to avoid overinsurance or underinsurance!
- Assess your coverage needs before taking out home insurance. Not all policies are the same and some offer additional cover that you may not even need.
- Choose a flexible policy, The insurance policy 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 than an insurance broker, as is our case.
At PIB Group Iberia We can become your trusted broker and help you choose the most suitable cover for your needs. We will prevent you from overpaying and make sure that, in the event of a claim, you get the most favourable and fair compensation possible. Would you like to contact us?
