Lost item insurance.... how much paid out?

caliew

Hi did you receive a policy booklet? It should be the last sections in the policy booklet of contents that usually cover high end items

TSx

maddogb wrote: »

I have been warned about a dubious practice by some insurers that involves a deduction by the same percentage you were under insured for, don't know the details on when it applies but watch out for it.

Simplified Example not including excess.

If I have cover for £10,000 but my possessions to the value of £15,000 are destroyed and I claim for them.
Some insurers work on this basis you are under insured by 33.3% so any part claim will be your insured limit minus the underinsured value ratio. so payout would be £10,000 minus 33.3% = approx.
£6,670
Not sure how widespread this is yet and don't know if it applies to "special item limits" but do make sure you are covered enough by double checking values.

This 'dubious practice' has been around for a very long time and is known as 'average'.

Your example does not work - the correct way to calculate is to look at the proportion insured and apply it to the loss.

So in your example - £15,000 loss with £10,000 of cover - 66% insured means that you calculate a third of £15,000 and that is the payout - which is £10,000 - average will never operate with a total loss as you will always end up at the sum insured.

Where it could operate is if you have a loss of £6,000 but total goods worth £15,000 and cover of £10,000 - again you have insured 66% of your contents and the partial loss payment could then be reduced by a third to £4,000.

This is because you cannot choose what contents you insure and what you don't want to insure - you are asked to declare the total value of all your contents and this is the number used to decide if the risk is acceptable and what terms are offered.

With that all in mind, it is a very old principle and has essentially been superseded by the Consumer Insurance Act 2012 - the same principles apply but the premium is used as the deciding factor.

So now the calculation would be

You paid a premium of £100, if they had known about the true value of your contents they would have charged a premium of £150. Again, you have paid a premium of 66% of the correct premium if you had declared everything and any part loss payment can be reduced by a third.

In practice, the premium is only likely to go up by a small amount if the sum insured is increased and as such the reduction is likely to be lower. Insurers are also likely to have a tolerance for underinsurance to avoid penalising those who make a simple mistake (anything above 80% adequately insured being OK is a figure I've seen a few times)

The ombudsman have a technical resource here on how they look at averaging but it hasn't been updated since 2014 and in most cases insurers should now be using the proportionate settlement remedy from the Consumer Insurance Act unless the policy contains an average condition and applying that condition would put the consumer in a better position (if I read it correctly - I'm not an underwriter!)