An example of underinsurance
A policyholder has three buildings on site which are insured for a total sum insured of £300,000, and fire breaks out in one building causing significant damage. The claim is reported to the insurer who appoints a Loss Adjuster to oversee the claim. The Loss Adjuster’s role is to determine if:
- The value at risk, being £300,000, is adequate to reinstate all three buildings
- The loss is covered under the terms of the policy
- The repair costs are fair and reasonable
While on site, the loss adjuster will measure each building to calculate whether the sum insured is adequate and reports back to the insurer that the ‘value at risk’ should be £600,000 and the ‘general average’ condition should be applied. Upon obtaining estimates, the cheapest estimate for repairs is £100,000. In this instance, the insurer would be entitled to reduce their claims payment to £50,000 as the value at risk was only 50% insured with the policyholder bearing the remaining 50%.