Insurance Claims and Underinsurance

Alastair Paterson and Martyn Bould

Friday, October 8, 2004

In this first of a series of articles about insurance claims, loss adjusters Alastair Paterson and Martyn Bould tell you how to file a claim with your insurance company and explain the concept of averaging that may apply if you are underinsured.

If you have insurance on your property that was lost or damaged during Hurricane Ivan, it is important that you get in touch with your insurance company or insurance broker as soon as possible to let them know that you will be filing a claim. Most insurance policies have a time limit of between 14 and 30 days to file a claim after the event causing the loss, although we understand that some of the insurance companies in Cayman are allowing some leeway due to the catastrophic nature of Ivan. Today is already 26 days after Ivan.

When you visit your insurance company, pick up one of their claim forms and fill it out by completing it as fully as you can. If you have not already done so, you should take photographs of all your property that has been damaged and submit these to the insurance company along with your claim form.

Your insurance company will then send out a loss adjuster within a few days to inspect your damage with you. This is a good opportunity to discuss your claim. The loss adjuster is a good person to talk to as you may have a number of questions. An important subject to discuss is what the insurance industry refers to as “averaging”. Averaging applies where the insurance company believes that the property lost or damaged is underinsured. The final settlement that you are offered may be much less than you expect because of this.

An example is the easiest way to explain a typical scenario (insurance policies vary – so your situation may differ from what follows - so it is very important to review your policy carefully). If, for instance, you have a home that is 2,000 square feet in area and you have it insured for $100,000, the insurance company will assess a value on the home, which is typically based upon an estimate of building costs which can range from $75 to $150 + a square foot, depending upon the quality of construction and finish.

Let’s assume that the insurance company believes a fair cost of building your home to be $100 per square foot, then it will assess the value of your home (excluding land) to be $200,000. This value is what you should have insured your home for to be fully covered. In this case, your home is considered to be 50% insured.

Any costs of repairing the damage to your home will be “averaged” by 50% in this example. So, if your builder estimates that it will cost $60,000 to repair your home, the insurance company will only pay out $30,000, being 50% of $60,000; and from that they will also take off the deductible which is typically 2% of the sum insured, which in this case will be $2,000.

In this example, you would only receive a final settlement of just $28,000 against the cost of rebuilding of $60,000. If you have a mortgage on your home then the settlement will likely be paid directly to your bank where you have your mortgage.

Averaging also applies on your contents. This is a very common problem, because many people are underinsured on their contents. If you went through every room in your home before Ivan and itemized every single item in it and then placed a value on each item, you may be surprised to learn how much your “stuff” was worth before the hurricane.

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