Why Underinsurance could cost you more than you think

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Why Underinsurance could cost you more than you think

Understanding the risks and how to avoid them.

Having insurance in place might give you peace of mind, but it doesn’t always mean you’re fully protected. Underinsurance – when the amount your asset is insured for is less than its actual replacement value – is a growing issue in South Africa, affecting both individuals and businesses. And the consequences can be financially devastating.

While opting for lower cover might reduce your monthly premiums, the long-term risks can far outweigh the short-term savings. In the event of a claim, if you’re underinsured, your payout might fall short of what you need to recover or replace what was lost.

What is the Average Clause and why should you care?

Many insurance policies include what's known as an “average clause”. Simply put, this clause reduces your payout if your property is underinsured at the time of loss. The insurer calculates the percentage by which your item was underinsured and reduces your claim payout accordingly, leaving you to make up the difference out of pocket.

Here’s an example:
If your home is worth R2 million but insured for only R1 million, and you suffer R500,000 in damages, you might only receive half of that amount because you were only covered for 50% of the replacement value.

Common causes of Underinsurance

  • Rising replacement costs: Inflation, especially in construction and materials, can quickly outpace your original insured value.
  • Outdated policies: If your policy hasn’t been reviewed in years, it likely doesn’t reflect the current value of your home, office, or belongings.
  • Misunderstanding coverage: Many policyholders assume their assets are covered for full replacement value – when in fact, they’re not.

How to Protect Yourself

Avoiding underinsurance starts with being proactive. Here are a few essential steps:

  • Review your policies regularly
    Don’t “set and forget” your insurance. Schedule annual reviews to ensure your sums insured still match the current value of your assets.
  • Get professional valuations
    Enlist a qualified valuer to assess the replacement cost of your home, business premises and contents. This should take into account local building costs, labour, professional fees and finishes.
  • Understand your policy
    Read the fine print. If you’re unsure, speak to your broker or your insurer to clarify exactly what is, and isn’t, covered.

In a country where the unexpected can strike at any time, from fire and theft to extreme weather, making sure you’re adequately insured isn’t just a box-ticking exercise. It’s a crucial step in protecting what matters most.

If you’re unsure whether your current insurance cover is sufficient, now’s the time to take action. Reach out to your broker or insurer for guidance, and don’t leave your financial security to chance.