If not already, at some point in your life you are going to get your own place and fill it with all types of stuff. For the purpose of this blog post, let’s refer to your “stuff” as household contents. Yip, we are talking about that nifty new 4K flat screen TV that’s mounted on the living room wall, the stainless steel double door fridge in your kitchen,and even your rickety old bedside table, left to you by your grandfather. When it comes to your household contents, you have two choices – you can either decide to insure them or you don’t. It all depends on how much you have to lose. If you live in a studio apartment with a queen size bed, one couch, and only a few other pieces of furniture, then perhaps you don’t have that much to lose. If you have a five bedroom house filled with high-end furniture and state-of-the-art appliances, it’s safe to say you have a lot to lose. In this article we’ll touch on the single biggest mistake you can make when it comes to your household contents cover and why you want to avoid feeling like you got the short end of the stick.
What would you say the total replacement value of your household contents is? Imagine for a second that your place burnt down and you couldn’t recover a single thing. Before you say “That will never happen to me”, take a minute to consider how many people lost everything they had in the recent Knysna fires.
Honestly, what would it cost you to kit your place out again? It’s a tough question, isn’t it?
Most policyholders simply thumb suck a value rather than taking the time to complete a proper inventory. The risk is that if you suffer a “total loss”, your insurer might determine in the claims assessment that you’ve been under-insured and they can apply what’s called “average”.
What is “average”?
It’s a word you don’t want to hear uttered by your insurer, but it might be easier to explain with a quick example:
Let’s assume that you have insured your household contents for R100,000. You figure if someone broke into your place, they would only go for the flat screen TV which costs you R10,000, so another R90,000 should cover you adequately. You didn’t take the time to complete an inventory or even bother to tally up everything in your house.
Fast forward six months and you are chilling on the beach, enjoying your well-deserved annual leave. Your phone rings and it’s your next-door neighbour. You can sense by his tone that he hasn’t called to let you know that the National Lottery guys are at the door with a big blank cheque.
While you’ve been away your place has been broken into and they have cleaned you out (even the pet bowls have been loaded up).
No worries, you have cover in place…
A week later the insurance claim’s assessor pops around to evaluate the claim. He moves methodically through each room of your house, taking notes and asking probing questions:
“They took the flat screen TV? How much do you reckon it would cost to replace it?”
Without even thinking you reply back, “I bought it for R10,000 so I assume R10,000.”
“And they cleaned out all these rooms as well?”
“Yip everything including the pet bowls,” you reply sheepishly.
One week later the phone rings and it’s a claims consultant from your insurer. The news isn’t good. In actual fact it’s pretty bad.
Rather than paying you out the R100,000 you expected, they are only going to pay you out R50,000.
Wait, back up a second! What do you mean they’re only paying out R50,000? How is that possible when I was insured for R100,000?
Why am I only getting a 50% pay out?
Let’s leave the scenario for a second and get back to some insurance talk.
The idea with all short-term insurance policies is that you are always put back in the same position before suffering your loss (no better or no worse).
But when you under-insure (on purpose or simply by accident) the insurer gets a little disgruntled. Their argument is going to be:
You should have been insured for R200,000 but you decided to insure for R100,000. That means you have taken on 50% of the risk and at claim stage it’s only fair that they are liable for 50% of what was stated on the policy schedule.
That’s the easiest way to explain “average”
Hold on a second. How would they even know how much stuff I had at home?
That’s a fair question. They don’t, and that’s the first problem you have. You haven’t provided them with an accurate inventory, so everything is up in the air and tough to prove.
The assessor would have used this logic.
- Your entire house was cleaned out
- One item on your schedule was worth R10,000 (the TV)
- You had a total of R100,000 as the insured value on your policy schedule
- In his estimation you could easily have had R200,000 worth of contents in your house (having walked room to room)
- You are 50% under-insured and as a result the insurer is only going to pay 50% of your claim
The problem you have is that you took a gamble that didn’t pay off! In your mind, the flat screen TV was the “risky” item and you decided not to insure the balance of your household contents correctly. During the break-in they didn’t only steal the TV, they took everything you had (which you didn’t plan for). This could have been avoided if you had insured correctly.
How do you avoid a scenario like this?
Make sure you don’t take any chances and insure for the correct replacement value.
Replacement value is the key take-away here.
If you’ve had your fridge for 20 years and reckon you wouldn’t get much more than R2,000 at Cash Converters for it, you might want to get your “insurance assessor hat on”. You can’t buy a new fridge for R2,000. At best you might be able to get a tiny bar fridge to keep the beers cold, for that price.
Your insurer is interested in the replacement value of your goods.
The second thing you need to do is complete an inventory.
Take the time to run through each room in your house. Jot down all the items and think about what it would cost to replace that item. If you are having a problem, jump online to get an idea of retail prices. Once you have completed your inventory, tally it up and that’s the value that should reflect on your policy schedule.
You never think it’s going to happen to you, but the day it does, you will be glad you took the time to double check your household contents value.
Until next time.
The Wise About Life team