Underinsurance and the Principle of Average

Underinsurance can be described as having packed enough food for two people for your road trip, when there are five of you in the car. Underinsurance occurs when your insurance cover isn’t enough to match the value of the items you own. So, if disaster strikes — such as burglary, fire, storm damage or flooding — your insurer will not pay the full cost to repair or replace your property and will only pay for a portion of your claim.

With the current economic climate and rising costs of goods and services, many of us try to save as much money as possible. It’s common for policyholders to choose a sum insured amount based on estimates or lower amounts to reduce premiums, without understanding the consequences. Rather than accurately insuring items for their replacement value or the true reinstatement value of the property, people end up underinsured — often realising this only when it’s time to claim.

Common Mistakes Leading to Underinsurance

• Not updating your contents or building’s sum insured based on current replacement value, especially after buying new items like furniture or appliances.
• Calculating your sum insured based on what you paid, not what it would cost to replace or rebuild today.
• Leaving out smaller items like shoes, bags, watches or gifts — these add up quickly.
• Not including professional and demolition costs, debris removal or compliance costs in your building cover.
• Basing your insured amount on what you can afford in premiums rather than the actual value of what you own.

Example

If your building is insured for R1 million, but the actual reinstatement cost is R2 million, you’ll be underinsured by 50%.
If a fire causes R50,000 worth of damage, your insurer will only pay 50% (R25,000), less your excess.
This is due to the principle of average, which means you’ll only be paid in proportion to how much of the true value you insured.

How to Know if You’re Underinsured

• Conduct a full asset inventory of your household contents.
• When insuring buildings, always insure for the current rebuilding cost (including architect, demolition, and debris fees).
• Compare the total of these values to your insured amount — if they don’t match, speak to your broker.
  
  

Does Inflation Affect Underinsurance?

Yes. Even if your insurer applies an inflation-linked increase, some items (like jewellery, art, or rebuilding costs) may appreciate faster than that rate. Review your insured values regularly to make sure they keep up.

How Often Should You Review Your Cover?

At least once a year — at renewal or if your situation changes.
Examples:

• Renovations, extensions, or adding a pool.
• Purchasing expensive furniture or appliances.
• Working from home (new office equipment).
• Receiving valuable gifts or installing solar/security systems.

Always tell your broker about changes — it can affect your cover.

Rebuilding Costs Include

• Demolition and debris removal.
• Professional fees (architects, engineers, surveyors).
• Building regulation compliance.
• Full cost of materials and labour.

How to Avoid Underinsurance

• Avoid “guesstimates” — insure for replacement or reinstatement value, not purchase price.
• Update insured values at least once a year.
• Get updated valuations for high-value items.
• Don’t lower your cover to reduce premiums — it can cost you later.

Lower Premiums Without Risk

Speak to your broker about choosing a higher excess instead. This can lower monthly premiums, but remember you’ll pay more out of pocket in a claim.

Final Word

Being properly insured means you’re protected when the unexpected happens. Review your cover regularly and ensure your insurance reflects the true value of your assets — giving you peace of mind when you need it most.