In brief - Under-insurance can leave you severely out of pocket
in the event of a claim
Under-insurance can have dramatic consequences for a business,
as it can leave you without sufficient cover in the event that a
claim is made under the policy.
What is under-insurance?
Under-insurance arises when property is valued for the purposes
of a liability policy for less than its value. For example, a
business may insure the value of its stock at $100,000. A premium
is calculated by the insurer on this basis.
However, if there is a fire where the stock is stored and it
turns out that the value of the stock had increased to $200,000,
then when it comes to calculating the insured loss, under most
liability policy wordings the insurer is entitled to impose a
penalty via under-insurance averaging or co-insurance
Accordingly, even though the sum insured on the policy is
$100,000, the business is likely to receive something less, as the
insurer expects the business to have insured the full amount of the
What if one of your customers makes a claim against you?
Under-insurance also arises when a business fails to estimate
accurately the value of claims which could be made against it by
its customers. For example, a suburban accountant acting as a sole
practitioner, dealing primarily with tax agent work, may consider
that an insured sum of $1 million for any claim in negligence would
But consider this scenario. The accountant provides advice about
the sale of a business and associated assets. If the client then
makes a claim for $2 million for failure to advise about the tax
consequences of the sale of an asset, the accountant could be (at
least) $1 million out of pocket.
What steps should you take to protect yourself against
With liability policies which cover property and business stock,
be careful to insure the full value (replacement cost), otherwise
you risk receiving even less than the sum insured because of the
averaging provisions in the policy. If the value of stock at the
premises is increasing over time, or there are increases in
business turnover, then you should inform your insurer.
In any event, you will be obliged to make such disclosures at
the time of renewal of the insurance policy. This may result in
additional premiums being charged, but will more likely protect you
against the consequences of under-insurance.
Assessing the risk of claims being made against your
For other liability policies, including professional indemnity
and public liability policies which cover breach of duty, closely
assess the risk of claims being made against your business and the
potential quantum of such claims. In addition to reviewing your own
business, this may require a detailed analysis of your client base
and the business they are doing.
For example, if you are a logistics company which regularly
transports expensive goods for clients, what happens if those goods
are damaged in transit due to your breach of duty or conduct? What
if you can't rely on appropriate conditions excluding your
liability because they haven't been properly incorporated into
the contract of carriage? Will your insurance be sufficient to meet
Review your insurance policies regularly and get professional
Carefully review the appropriateness of the sums insured on each
of your policies on at least an annual basis. If there are
significant changes to your business during the year, either in
business turnover, stock value or building reinstatement and
replacement costs, be sure to disclose this to your insurer.
Speak with a licensed insurance broker or insurance adviser who
has experience with the type and level of cover required in your
particular industry. If you don't know where to start, ask your
industry association. They are likely to be able to recommend a
broker or insurance adviser to you.
Under-insurance could lead to disputes with your insurer and
significant legal costs
Another consequence of under-insurance, depending upon the
precise policy wording, is that the insurer may still have the
right to conduct the defence of any claim made against your
business and to engage its own lawyers to do so.
However, your interests and those of your insurer may not always
align, particularly if your business has a significant
under-insurance exposure and there is a debate between you and your
insurer on the question of liability.
In those circumstances you may want to consider obtaining your
own independent legal advice throughout the process. This comes at
an additional cost, but will likely protect your interests.
Of course, if there were no issues of under-insurance and the
policy covered the entire claim, then in the event that the policy
responds, it is unlikely that you would need to appoint your own
The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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