COMMENT: Is the sum insured on the policy sufficient to provide adequate cover?

By Patrick Elston

 

The fevered speculation as to which organisation is to be the next target for a foreign takeover has not left the Cyprus Insurance Market completely unscathed in this respect. Whilst the ownership of your Insurer may be of considerable interest there are other aspects of the specific insurance covers of industrial and commercial companies and even private individuals that I feel should be of more immediate concern.

The premium charged by Insurers on almost all forms of property insurance is calculated by reference to the value of that property stated in the insurance policy. This value is normally derived from information supplied by the insured in a document called a Proposal Form, which provides the basic information upon which insurers will base their calculation of premium and the format of the Insurance Policy. There is no legal obligation on an Insurer to check that a particular insured person or company has valued their property correctly, be it a motor vehicle, a house, a shop, a warehouse or a major industrial plant.

The difficulty that arises is that insurances of property are subject to what is known as “Average”. This is a provision which stipulates that if the sum insured is less than the value of the property at the time of the loss the insured shall be considered as being his own insurer for the difference and shall bear a rateable share of the loss. This is a concept that many people find difficult to grasp, and another way of putting it is that the Insured will only receive the proportion of a loss that the sum insured bears to the actual value, which is known as the Value at Risk.

The arithmetical calculation that occurs can be shown as follows:

 

Sum Insured £/€   x  Loss £/€     =  Amount payable £/€

Value at Risk £/€

 

In simple terms if you insure your property for 50% of its actual value you will only get half the loss paid in the event of disaster striking.

The message therefore is that when insuring property the insured party must make sure that the sum insured on the policy is sufficient to provide adequate cover. This is a simple message intended to alert the reader to a common problem, which is currently more prevalent as a result of the effects of inflation, particularly on building costs. The simple message contained in this article will raise more questions that it answers and I hope to be able to provide more detailed assistance on this and other insurance problems in forthcoming articles.

 

* Patrick Elston, MIILA; F.C.I.Arb., Solicitor, is an expert on property, marine, liability and engineering insurance. He is Director of Cunningham Lindsey Cyprus the Regional Office of Cunningham Lindsey International a worldwide Insurance Loss Adjusting Group.

 

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