So the worst has happened and your arts organization needs to make an insurance claim. The incident’s covered under your policy, but your insurers are saying they’re not going to pay out the full amount of your loss – even after the policy excess has been deducted. How can this be?
HOW THE APPLICATION OF THE ‘CO-INSURANCE’ CLAUSE COULD HIT YOUR ARTS ORGANIZATION HARD
The answer lies in your policy conditions – in particular the ‘Co-insurance’ clause. If this clause is applied by insurers in the event of a claim, it means that where the sum insured is inadequate (i.e you’re under-insured), the insurer can reduce its liability for a claim by applying a proportionate approach. The sum to be paid out is usually calculated as follows:
(True value at risk) x (loss) = claim sum to be paid
So for example:
Your property is worth $1,000,000.
You insure it for $800,000.
You suffer a loss of $500,000.
If your policy is ‘subject to average’, the maximum amount you recover will be $400,000.
So how can you prevent this happening to you?
- Review your sums insured on a regular basis – always at renewal and certainly when you’ve made significant purchases or alterations to your business
- Most property policies are now on a ‘reinstatement as new’ basis of cover, so make sure the sum insured reflects this, and not your discounted book value
- Don’t forget that it’s not just property polices that are ‘subject to co-insurance’ – this clause also applies to consequential loss, goods in transit and cancellation policies
Finally, why do insurers make their policies subject to this clause? The answer is simple: they need to make sure they receive the right level of premium for the risk they’re being asked to undertake.
Don’t let this kind of problem jeopardise your claim – let us help you do a great job and make good insurance decisions for your arts organization!
For more information email Elaine Lamb.
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