Fergusons Insurance Brokers

39B Davey St Frankston, Victoria
Phone: (613) 9783-3200

Co-Insurance / Under-Insurance

Underinsurance is when the value you have insured your property for is not enough to cover the full value of the items you are insuring.

You will find that most commercial property insurances within Australia will have what is called a co-insurance or under-insurance clause. This allows the insurers to penalize the owner of the property who under-insures. The main purpose of the co/under-insurance clause is to encourage people to fully insure their property and penalize others who do not insure to the full value.

An example of how co/under-insurance on a partial loss scenario works, is as follows:

Replacement Value of the Property: $1,000,000

Nominated value of the Property:     $   500,000

Replacement Value of Loss after Incident: $200,000

The insurer will calculate the claim scenario as follows:

Nominated Value: $500,000 divided by Replacement Value: $1,000,000 = 0.5 x 100 = 50%

Claim Settlement: $200,000 x 50% (co-insurance clause): $100,000

As you have only declared 50% of the correct replacement value, the insurer will only pay out $50% in this claims scenario, which means you have become your own insurer for the difference.

Most policies however do have a 10% safety net, where if your nominated value is at least 90% of the replacement value, the insurer will not ask you to contribute the other proportion.

To avoid the traps of the co/under-insurance clause, a builder or a professional valuer can help you work out the cost of rebuilding your property and any external structures such as sheds and fences. Also consider additional costs such as demolition, debris removal, and architectural, engineering, and council costs, when calculating the total replacement value.

Finally also ensure that you review your insurance policy regularly, to ensure that your original nominated value does not get eroded by inflation.