The Risks of Underinsurance and How to Avoid Them
In the intricate realm of insurance, a hidden threat looms over many companies and individuals: underinsurance. This issue arises when the true value of insured assets is not fully reflected in the insurance policy. In regions with diverse economies and constant risks, such as Latin America, it is essential for top management and decision-makers to understand and prevent underinsurance.
Consider this scenario: your company experiences a disaster—a fire, flood, or theft—only to find that the compensation you receive is significantly lower than anticipated. This happens because the declared value of your assets does not match the insured sum in your policy. Unfortunately, this situation is more common than one might assume.
» Grasping and preventing underinsurance is essential for senior management and company decision-makers. «
Practical Example:
Imagine you decide to insure your inventory and equipment, declaring their value to the insurer as $100,000. However, after a thorough assessment, you find that their actual value is $200,000. If an incident results in a $50,000 loss, the insurance company will apply the proportional rule. Consequently, you would receive only 50% of the expected compensation, amounting to $25,000.
It’s important to note that the proportional rule is not a mandatory action. The legislation allows insurers and insured parties to agree to exclude this rule when contracting the policy. However, this agreement must be explicit and clearly stated in the insurance contract.
It is common practice to opt for first risk coverage to prevent underinsurance.
Consult your insurance broker for guidance.
How to avoid underinsurance?
- Stay in Touch with Your Insurance Broker:
Before finalizing any policy, ensure you are in regular communication with your insurance broker. Provide precise information about your assets and activities to be insured. Address any questions regarding coverage limits and the calculation of indemnities in the event of a loss.
- Accurate Property Valuation:
Accurately determine the true value of your assets or activities. An expert insurance broker can assist you with this, helping to prevent undervaluations that might result in underinsurance.
- Evaluate Additional Coverages:
Certain assets or activities may need specialized coverages. Consult with your insurance broker to assess the necessity of adding extra protections based on value or associated risk.
- Regular Policy Review:
Since the value of your assets can change over time, it’s essential to routinely review and update your insurance policies. Inform your insurance broker of any significant changes, such as renewals, acquisitions, or enhancements to your assets.
” Avoiding underinsurance is a continuous effort that demands vigilance and proactive measures. By keeping a close relationship with your insurance broker, you can adjust your policies to match your evolving needs, ensuring appropriate coverage at all times. “
In summary
Safeguarding your assets involves more than just purchasing an insurance policy. It’s a dynamic process that requires ongoing collaboration between the insured and their insurance broker to prevent unexpected issues when a loss occurs. Effective risk management is crucial for business success in our ever-changing environment.
