Contents Insurance and Replacement Value

You know the ad where the guy sleeps very soundly at night, not a care in the world – he has insurance cover. Insurance cover can indeed be seen as a blanket, covering you and protecting you as you sleep.

What if you outgrow your blanket?

In our family the new-born babies where literally rolled into little balls, secured by their blankets, my mother told us it keeps them feeling save. But babies grow up and very soon their baby blankets are not big enough to cover them anymore. It is good to look at your household insurance as a blanket; but it will be even better to remember that the blanket that covered you last year may be too small this year.

Replacement Value, what is that?

With content insurance there are some terms you must understand, one of them is replacement value. If you insured your household contents for R50 000 five years ago, what would it cost you to replace the contents at today’s prices? Certainly a lot more! Contents must be insured at current replacement values – should a fire destroy everything in your house the insurance company will need to replace it with new items, they are not going to look for a lounge suit that is five years old to replace yours with! Replacement value means old for new, your old lounge suite will be replaced with a new one…if you were not under-insured.

Under-insurance is an ugly word

When you place a value on your contents for insurance purposes you need to calculate it at current replacement values. This will mean that you need to spend some time to make a proper inventory of everything that is insured and review your list every year. Remember to add new additions and remove old items you no longer have. You then need to confirm the value you have arrived at with your insurer and only then can you sleep peacefully under your insurance blanket.

The worst case scenario

A freak flood destroys everything in your house. You make a list of everything that needs to be replaced and claim this from your insurer. The replacement value of everything that was destroyed comes to R75 000. But you have never adjusted your contents cover and left it at R50 000. You were under-insured by R25 000 and the insurer will only pay out R50 000.

The average clause

Another insurance term you need to understand is the average clause. What happened in our example above is that the average clause was applied, you were not insured for full replacement value and the insurance company will deduct the percentage of underinsurance off your claim, it this case 33%. You have become your own insurer for the balance of the loss.

An important point to note is that the average clause is always applied, not just in the case of a total loss. If you have only lost a number of items and the replacement value (and your claim amount) is R15 000, the insurance company will not pay you the full R15 000. You will receive R15 000 minus the percentage of under-insurance, in this case 33%. You will therefore only receive R10 000 (R15 000 minus 33% = R5 000.) As you can see under-insurance can cost you dearly.

Prevent the under-insurance trap

To prevent the average clause being applied you need to take the responsibility to ensure that your contents are properly valued at new-for-old replacement values. Once you have drawn up a full inventory (which will take some time the first time round) it’s a matter of keeping it up to date. When you buy anything of value, keep the receipt as proof. A good idea is to take pictures of your valuable items.

Keep your inventory, proof of purchase receipts and pictures in a save place, not at your premises. It’s going to be of no help when it’s destroyed in the same fire as the items you have lost! Anyone who has been through a burglary or robbery (and unfortunately in South Africa there are many of us) will tell you that it is a traumatic experience. It is not easy to keep a clear head and try to determine at such a time exactly what is missing. Had you kept an up to date inventory it would be no problem to ascertain the missing items.

In South Africa it’s not a matter of should or shouldn’t you have insurance; it’s often a matter of how much you can afford. As you have seen above, under-insuring your household content to save a small amount monthly can cost you much more in the end. Be wise.