Insured declared values: Cost of under or over-insurance

At a glance:

• Incorrect declared insurance values can lead to under or over-insurance.
• This can, for example, impact your claim settlement or result in inflated property insurance premiums.
• Insurance policy terms may penalise insured businesses in the event the declared values are inaccurate.

As businesses emerge from COVID-19 and attempt to shore up their cash and liquidity, devastating events like the 2021 Western Australia bushfires and NSW floods are timely reminders of the compounding risks facing organisations in the current climate.

The cost of insurance is rising, and this consistent upward trend is mounting pressure on the bottom-line of businesses. In Q4 2020, Marsh’s Property Insurance Market Recap revealed a 31% year-on-year increase in property insurance premiums across the Pacific, including Australia.

Hence, when tragic events like bushfires and floods unfold, businesses may seek to rely on insurance policies to respond only to realise that their assets are under or over-insured.

It is extremely rare that an insurance valuation reveals that the nominated declared values are correct to the exact dollar. This means that there is typically a variance between declared values and the true insurable value of assets.

This can be for a variety of reasons. Here are four examples:

1. Declaring the value of only some insurable assets (i.e. focusing on buildings and ignoring the contents and equipment).
2. Declaring the values on an incorrect basis (i.e. market or book value).
3. Not considering the current building codes.
4. Not taking into account elements such as inflation or removal of debris in the declared values.

Failing to nominate the correct sum insured can be disastrous. It can severely impact your claim settlement and your ability to bounce back after a loss.

Are your insured asset numbers right?

An over-value can lead to paying more premium than you need to. On the other hand, an under-value can lead to an insufficient payout in the event of a claim.

In our experience, correctly valuing properties for insurance purposes requires a deep understanding of the underlying issues that affect the level of insurance cover your organisation needs. Engaging an expert insurance valuation team to help you declare the correct sum insured and sub-limits has never been more critical.

Double blow if a claim is pursued

In the midst of this hardening insurance market, Marsh is seeing more insurers re-introducing what’s known as a co-insurance or average clause for property insurance policies. Put simply, this is a clause within an insurance policy that can penalise the policy holder in a loss event when the declared values are inaccurate.

The potential effect of this clause is that, if a partial loss were to occur and it was determined that the assets were not declared for the correct amount, the claim payable by the insurer may be reduced proportionally to the undervalued declaration.

For example, a total location is currently insured for $10m and a loss occurs with the value of the damage determined to be $5m. After the loss, the insurer determines that the total declared value for the location should have been $20m. In this example, the location has been under-declared by 50%. This could lead to the claim amount being reduced by the same proportion (50%) and see a settlement of only $2.5m, rather than the full loss amount of $5m.
Undertaking a valuation will assist your broker to negotiate the policy terms with your insurer and may mitigate the potential impact of a co-insurance or average clause.

The test of today

Given the unforeseen circumstances of the past year, it is unsurprising to see volatility in the cost to replace assets; whether this is through impacts on labour due to widespread losses, delays in importation of materials or ever-changing exchange rates.

This raises a valid question: How much is enough to replace an asset in the event that it needs to be rebuilt in today’s market?

Learn more from our experts

Read more about how you can prepare for challenging property renewals.

Alternatively, our team of dedicated asset valuers can assist you. Contact us.

Please note: This document and any recommendations, analysis, or advice provided by Marsh (collectively, the ‘Marsh Analysis’) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Any modelling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings and makes no assurances regarding the availability, cost, or terms of insurance coverage. LCPA: 21/089.