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Today's quote:

Tuesday, November 20, 2012

Not your average insurer

 

Having had my flood insurance cancelled by NRMA Insurance - see here - I thought I might as well get quotes from other insurers. That seemed to bother the NRMA sales lady because she immediately suggested that I should reduce the sum insured to reduce the premium.

"Reduce the sum insured? But I might be under-insured?", I queried.

"No", said she, "you'll always be covered up to the total sum insured."

"Yes, but what about a partial loss?", I wondered.

"As I said, we'll always cover you up to the total amount insured."

I didn't have the heart to tell her that in a previous life I had served my articles in one of Germany's biggest insurance companies (I wanted to become an actuary but got bored with it and became an accountant instead) and remembered something about the "Average Clause" which goes something like this:


If property is under-insured, then effectively the policyholder is assuming the risk of the uninsured portion of the loss. Insurance policies deal with this uninsured portion by reducing or averaging the insurer's liability under the policy. If the property insured is either the principal place of residence for the policyholder or their family, or the contents of such a residence, the averaging clause will have no effect if the sum insured is more than 80% of the value of the property. If the property is insured for less than 80% of its value, then the sum insured shall be averaged in accordance with the following formula:

A x S
   P

where A is the amount of the loss; S is the sum insured; and P is 80% of the value of the property.

Right now I am insured for $600,000. She suggested I bring it down to $400,000 to reduce the premium by roughly a third. Okay, so if the place burns down and is a total loss, they pay me $400,000. But if it's only a partial loss of (say) $200,000, she's wrong in saying that they still pay me $200,000. If the place is really worth $600,000, then the "Average Clause" kicks in.

$200,000 x $400,000
        $480,000

Instead of $200,000, I'd receive only $166,666.

I'm not writing these blogs just for your entertainment, you know. I am trying to educate you!!! ☺