What is Over Insurance?

Earlier this month we discussed the risks of under insurance. In this post we would like to look at the other side of the coin and discuss over insurance. This is something that is not only important for property owners and their short term insurance cover, but also for those policyholders insured with death and disability benefits. In this post we would like to focus on short term insurance.

What is Over Insurance?

Over insurance can be defined as the situation where an insured has bought so much coverage that it exceeds the actual cash value (or the replacement cost) of the risk or property insured.

Example:

Your car is insured for R200,000 and is written off in an accident. The assessor comes to the conclusion that the car can be replaced for R160, 000.

As a result only R160, 000 is paid out. You have however been paying premiums to cover an amount of R200,000 and those premiums paid on the additional R40, 000 have been paid unnecessarily.

Over insurance is a risk to the insurance industry and especially to insurance fraud. The insured who is over insured may be tempted to make a false claim to profit from a loss.

Main differences between under and over insurance

The major differences between under and over insurance can be summarized as follows:

• Through under insurance you are insured for less than market value whereas with over insured you are insuring for an amount above market value.
• Your risk with under insurance manifests itself when you claim  – and find that less than the insurance claim will be paid as you would have to cover part of the damage yourself.
• With over insurance you are at risk of paying too much in premiums from the moment that the market value of insured property is less than the amount insured.

Why would anyone over insure?

• You may be so afraid of being under insured that you decide rather insure for more than necessary.
• Most often property owners will neglect keeping in mind the depreciation and declining market value of property.
• It is important to understand that prices change all the time  – and so does the costs of replacing something destroyed, lost or stolen.

How do we prevent over insurance?

It remains your responsibility – and not that of the broker or insurer – to ensure that your property is insured for the correct value.

• Be pro-active with your insurance and financial needs.
• Study the terms and conditions of your policy to gain an understanding of what your insurer regards as “over-insurance”.
• Review your insurance annually and ask your broker or insurance company to ensure that property is not insured for more than its market value.
• The aim should be to purchase the right cover and the right price.
• It is important as well to enquire as to your financial obligations to the bank if your vehicle is financed through a financial institution.
• Keep a file of invoices of goods purchased –but remember – you need to ask your insurer what the costs would be to replace these goods!

There is no reason for you not to have peace of mind that you are correctly insured. Communicate with your insurer, ask questions and keep your insurance cover updated! Now is the time to get hold of that insurance policy and align it with your current financial position!!