Avoid being over- or under-insured
The cost of rebuilding the Tremblay family’s home is estimated at $276,000. They insure it for this amount. Following several years of significant renovations and esthetic improvements, the cost of rebuilding the house increases to $345,000. Unfortunately, the amount of their coverage has remained at $276,000..
The Tremblays are “under-insured,” in other words, they are insured for less than the amount required to rebuild their house in the event of a total loss. Being under-insured also has an impact on compensation for a partial loss. What are these consequences? Several scenarios are possible.
The amount appearing in the contract
Pursuant to article 2493 of the Civil Code of Quebec, in the event of a total loss, the insurer will pay the maximum amount of coverage provided for in the contract. If the Tremblay family’s home was completely destroyed by a fire, the insurer would pay up to a maximum of $276,000—in other words, the amount of their insurance coverage. They would be responsible for the remaining $69,000 needed to restore their home to its condition before the fire.
Article 2493 of the Civil Code of Quebec also stipulates that the principle of proportionality applies in the event of a partial loss. Unless the contract states otherwise (see box on the “co-insurance clause” below), to obtain an indemnity that covers the full cost of damages in the event of a partial loss, one must choose an amount of coverage equal to the value of the insured property.
During a storm, the roof of the Tremblay family’s house is damaged. The claims adjuster declares it a partial loss and the damage amount is determined to be $30,000. According to the principle of proportionality, the Tremblays should have been insured for $345,000 to obtain full compensation. However, the amount stipulated in the contract is still $276,000. Since they are under-insured, the insurer has the right to apply the principle of proportionality and thus pays them only S24,000. They will have to assume the remaining $6,000 to have their damaged roof repaired.
The co-insurance clause
Some insurance contracts contain a clause called the “co-insurance clause.” This clause is more generous than the article in the Civil Code of Quebec since the minimum required amount in the contract is a percentage (most commonly 80%) of the value of the insured property.
Let’s go back to the example above: If the Tremblay family’s contract contains a co-insurance clause of 80%, they must be insured for a minimum for $276,000 ($345,000 X 80%)—in other words, the value stipulated in their contract—to be eligible to receive full compensation. Since they are not under-insured, the insurer could pay the entire cost of the storm damage to the roof, which amounts to $30,000.
Over-insuring one’s property—in other words, taking out insurance for more than the actual value of one’s property—is not necessary either; in the event of a total loss, the insurer will only pay out the amount required to replace the destroyed or lost items. Since the amount of the premium is partially calculated on the amount of the coverage purchased, being over-insured means that you will pay unnecessarily for higher premiums.
Though it can sometimes be tempting to insure items for an amount less than their actual value, there are other solutions to save money while maintaining proper coverage. It is preferable to choose the right amount of insurance and to consult a trained, certified damage insurance agent or broker to advise you on the insurance coverage that best meets your needs.