Pitfalls of Underinsurance

The cost of insurance is increasing and often clients are inclined to under-insure their property to keep costs down.

Usually the justification is based on a small mortgage/loan outstanding, or a belief the vessel is worth less than the market or survey value. Clients feel if they get the value of the insurance policy they will be happy.

This works until a loss occurs, particularly a small loss that is not a Total Loss, but one where Underwriters decide to declare the vessel a Constructive Total Loss (CTL) or Agreed Total Loss (ATL) or words/terms to that effect.

For example: Your boat insurance renewal has just arrived in the mail and it has increased twenty-five percent over last year. You are fed up with increases, year after year when you have had no claims and you decide to insure the boat for less.

The latest survey you have obtained values the boat at $100,000 but you only have a $25,000 loan on the boat. As far as you are concerned you only want to pay off the loan if you have a claim and you will take the loss for the difference. The premium for $25,000 is much less than $100,000 and you instruct your agent or broker to renew at the lower value and you save hundreds of dollars.

Then a claim occurs- Your boat is now insured for $25,000. The total damage to the boat is $5000, quite a bit less than the insured value of the boat, but the loss surveyor/adjuster determines the boat is worth at least $50,000 in its damaged condition and the Insurer declares the vessel a CTL, takes possession of the damaged boat and pays you $25,000. The Insurer then sells the boat for $40,000 and keeps the difference. Can they do that????

Yes. Your insurance underwriter, subject to policy conditions, etc., promises to pay up to $25,000 for damages to your boat. By paying you the $25,000 they have performed their end of the contract and paid the $25,000 you asked for. In exchange for this payment, you must sign over the title of the boat to them.

This determination is based on commerciality rather than reparability and is a legitimate course of action for the Underwriter.

This is the reality of underinsuring. We have seen it a few times and this is not the best way to save money.

If you have a survey, or in the absence of a survey, you have an accurate market value for your property, do not be foolish and insure for less than that amount unless you are prepared to accept the consequences.

If you cannot afford the renewal premium, there are viable alternatives available, such as financing the premium over a few months or making other changes that will have a less dramatic effect on claims.

Please call us to discuss any changes and the sensible choices before making an error that could cost you more than you save.

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