Here’s what you need to know

Avoiding Over-Insurance?

Avoiding Over-Insurance? Here’s what you need to know

"You have too much insurance,” is not a phrase commonly heard from insurers. However, the truth is, being over-insured is a genuine concern. Here’s what you need to know."

The risks of being under-insured are well documented, highlighting the importance of having sufficient cover for your investment property. However, what isn’t as widely discussed are the risks associated with being over-insured.

So, what exactly is over-insurance?

Over-insurance occurs when a property is insured for more than it would actually cost to replace. For instance, if you nominate a sum insured of $1 million for the building, but the actual cost to replace it is $750,000, you are considered to be over-insured.

Why is over-insurance a bad thing?

For one thing, over-insurance results in unnecessary expenses. When a property is insured for more than its actual value, the premium tends to be higher. Consequently, if the property is over-insured, you're likely paying excessively for your policy. Essentially, you're paying a premium based on a higher valuation than you could recoup in the event of a claim.

But why can't you recoup the total sum insured?

Most insurers will only reimburse you for the actual cost of the loss you have suffered.

Let’s revisit our example…

Suppose you've insured the property for $1 million, and it experiences a total loss due to a fire. After assessing the repair and/or replacement costs, the insurance assessor determines that restoring the property to its pre-fire condition would cost $750,000. In this scenario, your insurance pay-out will be based on the assessor's valuation, not the $1 million for which the property is insured. So, despite paying premiums based on the property's $1 million valuation, you'll only receive $750,000 from the insurer, as that's the assessed value. In essence, you've paid more for no additional benefit.

Insurers typically do not refund any premium overpayment resulting from over-insurance. They won’t reimburse the difference between the higher premium you paid and the actual premium you would have paid if the sum insured had been accurate.

But why do insurers enforce this policy?

Many insurers include a clause in their policy regarding over-insurance, stating, “if you over-insure, we will not pay you more than it costs us to rebuild, repair, or replace. We will not refund any premium overpaid for over-insuring…”

Regardless of the policy wording, an insurer is generally only obligated to pay out the value of the property that has been lost or damaged. This precaution is in place because a policyholder may be tempted to profit from a loss, which constitutes a 'moral hazard' for the insurance company.

Engaging in such behavior is ultimately considered deceptive. For instance, a policyholder may over-insure a property and pocket the difference between the actual loss and the insured value. Therefore, safeguards like the over-insurance clauses are implemented to deter such practices.

Getting the sums insured right:

When obtaining landlord insurance, it falls upon you to ensure that the sums insured are accurate. The goal should always be to procure the appropriate coverage at the right price. This entails getting your sums insured correct to ensure you have adequate cover.

Here are some tips for determining the sums insured:

If you are doing your own calculations:

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