Underinsurance – A simple term with potentially devastating consequences.

As the preferred partner of the Australian Veterinary Association (AVA), Guild Insurance understands the unique risks that face Veterinarian practice owners. One of the biggest business risks faced by practice owners is underinsurance. You need to consider the rarely discussed application by some insurers of the ‘average’ insurance clause and the potential impact it can have on property insurance claim settlements.

The ‘average’ clause is an insurance provision that can reduce the amount an insurer pays when a claim is made because the sum insured is lower than the value of the property. Unfortunately, most people don’t discover the impact of an averages clause until they come to make a claim; and by then, it’s too late.

Where a business owner’s insurance policy is subject to an averages clause, the financial impact can be disastrous. For example, if an insured event (e.g. fire, storm, and flood) causes $2M of partial damage to a building which is insured for $6M, but at the time of the claim its true value is determined to be $12M, the settlement would be calculated as follows:

In this example, the averages clause leaves the insured with a $1M shortfall due to underinsurance. That’s money that will have to come straight out of the owner’s pocket.

While specific averages calculations among competing insurance forms may vary, in whatever form they occur, underinsurance places a serious financial risk to practice owners who have unintentionally understated the true replacement value of the buildings or contents at the time of a claim.

One way of addressing this risk is to purchase a business insurance policy that provides an option to avoid exposure to the underinsurance/averages provision such as Guild Insurance’s Veterinarians Business Insurance policy with their ‘Reinstatement Plus’ basis of settlement.

Reinstatement Plus works on the proviso that the sums insured are to be calculated by Guild in accordance with the Cordell Building Cost Index*. Reinstatement Plus provides the insured with two main policy benefits:

Claims for total loss:

The policy provides a ‘safety net’ cover of 50%. This means that if the sums insured for buildings or business contents prove to be inadequate following a total loss, Guild automatically increases each of the sums insured by 50%, reducing the possibility of any uninsured loss.

Claims for partial loss:

Underinsurance or the averages clause will not be applied to partial losses. Meaning, under our previous example, the practice owner would receive the full $2M payout, and incur no personal loss on that claim.

Coverage under Reinstatement Plus is a significant policy benefit that is not widely available in the insurance market and is just one of these reasons why AVA recommend Guild Insurance as the insurer of choice for members.

For more information on this and other policy provisions, speak to a Guild policy advisor on 1800 810 213.

*Part of the global RELX Group PLC


Insurance issued by Guild Insurance Ltd, ABN 55 004 538 863, AFSL 233791. Guild Insurance supports your association through the payment of referral fees. This information contains general advice only and does not take into account what you currently have, want and need for your personal circumstances. It is important for you to consider these matters and read the policy and/or the Product Disclosure Statement (PDS) before you make a decision about an insurance product. Subject to underwriting approval. Terms and Conditions apply (including exclusions and limitations). You can get a copy of the PDS by calling 1800 810 213.