Underinsurance or ‘Average Clause’ is a condition found within the majority of insurance policy fine print. In the event of making a claim on your policy you may find yourself impacted by this condition in an already desperate time. It may not be your fault, and may occur without your knowledge, but it will be your burden to bear. It pays to ensure that you do not leave yourself vulnerable to the dangers of under-insurance when it comes to property and loss of rent claims. Here’s how to go about it.

Why you may be underinsured

Underinsurance is where you are insured for less than approximately 80% of the value of the property itself or the income you derive from it. Inaccurate estimations as to the cost of repairs or rebuilding may trigger the insurer to apply this clause, or you may have completed renovations which have increased the value of your property but not updated your policy. In addition, your policy may be outdated and not reflect changes in market trends, leaving your payout amount significantly less than the current cost of replacing your property.
Underinsurance can also apply to loss of rent claims for property owners. Whilst your commercial property insurance policy may protect against loss of rent, you need to ensure the limit of liability set is an accurate reflection of rental income received during the policy period and also accounts for additional outgoings paid by the tenant.
It is important to include variable outgoings in rental loss calculations when loss of rent is to be included in an insurance policy. Variable outgoings, or operating expenses, are landlord expenses that are usually contributed to by tenants for a specific purpose. In essence, they are the costs of operating, repairing and maintaining a property, and typically include rates, taxes, cleaning, and more.
To protect against underinsurance, variable outgoings are best devised by either calculating a base amount that is an annual projection to be paid proportionately in periodic instalments with rent, or a final adjustment made at the end of a financial year. Additionally outgoings can also be paid in arrears once receipts are received by the lessee from the lessor. This ensures that the amount paid reflects the true value, and so can be adequately included in an insurance policy.

Are rental increases included in your policy?

You may also be left underinsured in a loss of rent claim if your policy does not take into account the propensity for periodical rent increases during the policy period. Relying on an updated policy every few years may feel like an acceptable option, but in reality will place you at risk of a loss of income if your rental payments have increased over this period and not been reflected in the policy limit set. Ensure that your policy allows for such increase.

So check your policy now

Don’t wait until it’s too late to find out whether you are underinsured. Call Challenge Insurance Services on 1300 656 243 today for the most up to date, industry leading insurance advice in keeping you and your interests protected.