Are You at Risk of Underinsurance? A Recent Ruling Highlights the Importance of Accurate Valuations
A recent decision by the Australian Financial Complaints Authority (AFCA) has reinforced the serious financial risks associated with underinsurance. This ruling serves as a stark reminder for business owners to ensure their properties are accurately valued to avoid significant shortfalls in claim payouts.
What Happened?
In this case, a business owner filed a claim for damages amounting to $295,455.05 after their insured property was struck by a vehicle during a police chase. However, the property was only insured for $452,000, despite its Full Insurable Value being $1,864,646.01. Due to an underinsurance clause in the policy, the insurer was only obligated to cover a proportionate amount of the damages – 30.3% – which resulted in a payout of just $89,522.88. The insurer ultimately offered $104,038.16 due to a prior miscalculation in the client’s favour, but the ruling made it clear that the policyholder bore the financial consequences of underinsurance.
Reference: NIBA – AFCA Decision Highlights Impact of Averaging Provisions on Claim Payouts
Understanding Underinsurance Clauses
Many business insurance policies include underinsurance clauses (also known as averaging provisions), which allow insurers to reduce claim payouts if the insured sum is lower than the true value of the property. This means that when a claim is made, the insurer will only cover damages in proportion to the level of insurance taken out, leaving the policyholder responsible for the remainder.
While insurers are legally required to inform clients about these clauses – typically through the Product Disclosure Statement (PDS) – many business owners may not fully grasp their implications. PDS documents can be complex and lengthy, making it easy for critical details to be overlooked.
The Role of Insurance Brokers in Preventing Underinsurance
This AFCA ruling highlights the crucial role that insurance brokers play in protecting businesses from underinsurance. Without professional guidance, policyholders may unknowingly expose themselves to financial risk due to undervaluation of their assets.
At Phoenix Insurance Brokers, we work closely with our clients to:
- Conduct thorough risk assessments and ensure accurate property valuations
- Clearly explain policy terms, including underinsurance clauses
- Help businesses choose appropriate coverage to avoid unexpected shortfalls in claims
How You Can Protect Your Business
- Review Your Insurance Policy Regularly – Ensure your coverage reflects the current value of your property and assets.
- Consult an Insurance Broker – We can help you understand policy details and ensure you have adequate protection.
- Request a Professional Valuation – Engage a qualified valuer to determine the full replacement cost of your property.
- Stay Informed – Be proactive in understanding the implications of underinsurance and other policy provisions.
Don’t Wait Until It’s Too Late
Underinsurance can lead to devastating financial consequences for businesses. The best way to safeguard your assets is to ensure your coverage accurately reflects their true value.
If you’re unsure whether your business is adequately insured, contact Phoenix Insurance Brokers today. We’ll help you review your policy and ensure you’re fully protected in the event of a claim.
Get in touch with us to schedule a policy review and avoid the risks of underinsurance.
Important note – the information provided here is general advice only and has been prepared without taking in account your objectives, financial situation or needs. Phoenix Insurance Brokers (ABN 40 009 419 872, AFSL 229847)
This article provides information rather than financial product or other advice. The content of this article, including any information contained in it, has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the information, taking these matters into account, before you act on any information. In particular, you should review the product disclosure statement for any product that the information relates to it before acquiring the product.
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