What Can You Do About Being Under-Insured?

It’s flooding season in Canada. With the warm spring weather comes melting snow, sudden rainfalls, and saturated ground soil. While floods can happen any time of year, flood risks tend to be higher in the spring due to rapidly melting snow. The meltwater can swell rivers, overflow urban drainage systems, and saturate the soil in rural areas.

Flooding is one of the most common natural disasters in Canada. Flooding occurs five times more frequently than wildfires, and the potential damage done to your home ranges from water damage in the basement to extensive home repairs and replacing your personal belongings.

When your home is flooded, you turn to your home insurance policy for the funds to help you repair your home and replace your lost belongings. Your home insurance policy should help you fix structural problems, clean out mold, dry out your basement, and restore or replace any personal contents and belongings lost to the flood waters. But what are you supposed to do if you find out you are under-insured?

What is under-insurance?

There are several ways that you may find yourself under-insured. These include:

• An insurance policy that does not cover the total value of the property or a sufficient percentage of that value, i.e., the value of the property is significantly higher than the sum insured.
• An insurance policy that does not reimburse for a peril common to your area, i.e., your home insurance policy does not list flooding as a peril in an area at high-risk for flooding.
• Actual replacement costs exceed your policy limits.

What are co-insurance penalties?

Insurance companies add co-insurance clauses to a range of policies that cover buildings, contents, and equipment, to ensure that they receive fair premiums to properly manage the risks they take on. Co-insurance clauses are designed to encourage policyholders to accurately value their properties and take out an insurance policy that appropriately covers the property based on replacement cost or actual cash value. Co-insurance penalties can also be found on business interruption insurance, but this article will focus on its application to home insurance policies.

How do co-insurance penalties work?

Co-insurance clauses require the policyholder to insure 80, 90, or 100% of the true value of a property. For example, an 80% co-insurance clause would require a building with a $1 million replacement value to be insured for at least $800,000, or at least $900,000 if the co-insurance clause is 90%, etc.

If the property owner insures the property for less than the amount stipulated in the co-insurance clause, they become co-insurers and share the risk proportionally with the insurance company. If you have insured your home for less than the co-insurance clause, you will have to divide the costs with your insurance company in line with the level of insurance you’ve taken out.

There is a simple formula for calculating how much you would have to pay in the event of a loss if you were under-insured and faced co-insurance penalties:

(Actual amount of insurance / Required amount of insurance) X Amount of Loss = Amount of Claim

For example: Your property suffered a fire, and the home needs to be repaired but not entirely rebuilt, and it will cost $150,000 to make the repairs. The building is valued at $500,000 in replacement costs. Your 90% co-insurance clause requires $450,000 coverage, but your actual insurance only covers $300,000.

(300,000 / 450,000) X 150,000 = 100,000

Under this situation, the insurance company would provide $100,000 toward the claim, and you would be responsible for covering the remaining $50,000.

How to budget your recovery if you are under-insured.

Finding out you are under-insured can feel like a shock. You will have to manage your expenses to minimize the financial impact of rebuilding your life. Begin by creating a strategy that will help you reduce costs above your claim amount. You can read these strategies as well as check out our resource centre for further suggestions.

1) Avoid Restoration of Contents

The restoration process can be an expensive one, and it’s often not guaranteed to work. Upholstered furniture that has been saturated with water will be very difficult and expensive to restore, and even wood furniture can become a risk for mold and mildew. Restoration efforts can be just as expensive as replacement. If the restoration fails, the insurance company will probably still pay the restoration company out of your coverage, leaving less for you to use on replacement.

2) Minimize Storage Costs

You can also save money by sourcing alternate storage options. Storage units can become expensive quickly, especially if you need enough space for furniture. You will also have to deal with the costs of moving furniture into a storage unit and back into your home when the repairs have been completed. These are all expenses that would normally be covered by the insurance company, but that you might be left with if you are under-insured.

3) Reducing Your Additional Living Expenses

Additional Living Expenses add up quickly. These are costs such as temporary accommodation rentals, transportation, storage, moving, and food expenses that are the result of your displacement. Budgeting these costs can help you reduce the amount that comes out of your pockets. One way you can save money is moving yourself rather than hiring a moving company. If you do this work yourself, and have some coverage left at the end of the claim, you may be able to ask the insurance company for compensation. Check out our article on ALE expenses for more advice for saving money on Additional Living Expenses.

With careful planning and budgeting, you can rebuild after a flood even if you are under-insured. You may have to pay for part of the costs of rebuilding and replacing your personal belongings as co-insurance penalties, but the insurance company will still provide a portion of the reimbursement as part of your claim. Be careful with your expenses and learn about your rights and entitlements under your insurance policy. If you find yourself under-insured, we can help