The Hidden Risk of Underinsurance That Most Property Owners Don’t Know About
by AdminA RM300,000 loss could result in only RM150,000 compensation if your property is underinsured.
Most property owners believe that if they suffer a loss, their insurance company will pay the full amount of the damage.
Unfortunately, that is not always the case.
One of the most misunderstood concepts in property insurance is Underinsurance. Many property owners only discover this issue when they submit a claim and realise that their compensation is significantly lower than expected.
Let’s look at a simple example.
A Realistic Scenario
Imagine a homeowner whose property has a rebuilding value of RM1,000,000.
To reduce insurance premium, he decides to insure the property for only RM500,000.
After all, the house is unlikely to burn down completely, right?
A few years later, a fire breaks out in the kitchen.
The damage is assessed at RM300,000.
The homeowner expects the insurance company to pay the full RM300,000 because the house was insured.
However, that is not what happens.
Understanding the Average Clause
Most property insurance policies contain an Average Clause.
This clause applies when a property is insured for less than its actual rebuilding value.
In simple terms, if you only insure 50% of the property’s value, the insurer may only pay 50% of the loss.
The calculation is:
Claim Payable = Loss Amount × (Sum Insured ÷ Actual Rebuilding Value)
Using the example above:
RM300,000 × (RM500,000 ÷ RM1,000,000)
= RM150,000
As a result:
- Loss Amount: RM300,000
- Insurance Compensation: RM150,000
- Amount Paid by Property Owner: RM150,000
Although the property suffered only a partial loss, the underinsurance penalty still applies.
This often comes as a shock to property owners who assume that insurance will automatically cover the full amount of the damage.
Why Does Underinsurance Happen?
There are several common reasons:
1. Trying to Save Premium
Some property owners intentionally reduce the sum insured to lower their annual premium.
While this may save a small amount of money today, it can lead to substantial out-of-pocket expenses during a claim.
2. Construction Costs Have Increased
Building materials and labour costs have risen significantly over the years.
A sum insured that was adequate five years ago may no longer be sufficient today.
3. Renovations Were Not Declared
Many homeowners invest heavily in renovations but forget to review and update their insurance coverage afterwards.
4. Confusing Market Value with Rebuilding Value
This is one of the most common mistakes.
Insurance is generally based on the cost of rebuilding the structure, not the property’s market value.
The value of the land is usually not included in the insurance calculation.
It Doesn’t Only Affect Houses
Underinsurance is not limited to residential properties.
It can also affect:
- Shops
- Offices
- Factories
- Warehouses
- Machinery
- Stock and inventory
For business owners, the financial impact can be even more severe, especially after a major fire or other significant loss.
How to Avoid Underinsurance
The good news is that underinsurance can often be prevented with regular reviews.
Consider the following:
✓ Review your sum insured periodically
✓ Update your policy after renovations or extensions
✓ Take rising construction costs into account
✓ Ensure the sum insured reflects the current rebuilding value
✓ Seek professional advice when unsure
A small adjustment today may prevent a major financial burden in the future.
Final Thoughts
Many people focus on having insurance.
Far fewer pay attention to whether the amount insured is actually sufficient.
The purpose of insurance is not merely to own a policy. It is to ensure that you can recover financially when an unexpected loss occurs.
Saving a few hundred Ringgit in premium may seem worthwhile today, but it could result in tens or even hundreds of thousands of Ringgit in uninsured losses when a claim arises.
If you are unsure whether your home, shop, factory or office is adequately insured, consider reviewing your current policy before a loss occurs—not after.
Need a review of your current property insurance?
Contact LH Insurance for a policy review and ensure your property is insured based on the correct rebuilding value.
