Avoiding the Underinsurance Surprise
We thought we’d share an excerpt from an IRMI (International Risk Management Institute) publication in the US on underinsurance. We have noticed the same troubling trend of underinsurance resulting in hefty co-insurance penalties here in Canada.
Author: Ann Rudd Hickman, CPCU, CRIS, ARM, Assistant Vice President, Editorial, IRMI
Over the past 2 years, supply chain disruptions, an ongoing labor shortage, and the war in Ukraine have driven steep increases in the cost of goods and services, including the cost of construction. Last month, we examined the impact of these realities on builders risk insurance, but risk managers must consider the effects of inflation on other coverages as well.
The most obvious question is whether the limits of insurance are still adequate. For property insurance, an estimate of the cost to repair or replace damage to real and personal property is needed to answer this question. Insurance companies have tools for calculating replacement cost, but these are typically only used at renewal and so may not account for inflation during the policy period. For liability insurance, damages incurred by third parties will be equally impacted by inflation; therefore, liability limits should be adjusted to reflect the likelihood of higher awards.
Another potential risk associated with inflation is that coinsurance penalties in a property policy may be triggered. A coinsurance provision reduces the insurance recovery on a claim if the property is not insured to a stated percentage of value at the time of the loss. (The risk of a coinsurance penalty can be eliminated by incorporating an agreed value provision.)
Find more tips for ensuring your policies are protected against the impact of inflation by clicking here.