The term 'Value at Risk' is the amount defined in your insurance policy as being payable by an insurer in the event that the property is destroyed (by an insured event).
That is usually in respect of buildings:
- a) Cost of demolition, site clearance and disposal of debris.
- b) Reinstatement of destroyed building (to current standard or if listed to those requirement standards).
- c) Professional fees for design and supervision.
- d) VAT if VAT is payable by insured party.
Value at Risk relates to a range of insurable assets including Buildings, Machinery, Contents, Fixtures and Fittings, Stock, Computer Systems and Equipment, Business Interruption and Additional Cost of Working.
The cost of under-insurance and over-insurance for individuals and businesses in respect of buildings and business interruption amounts to millions of euro annually in Ireland at present. If a building is insured for more than its reinstatement cost then the policy holder is paying more insurance premium than they will enjoy benefit for.
Conversely if a building is under insured, it will cost the policy holder dearly if the insurance company apply 'Average'.
'Condition of Average':
Whenever a sum insured is declared to be subject to Average, if the property covered thereby shall at the breaking out of any fire or at the commencement of any destruction of or damage to such property by any other peril hereby insured against be collectively of greater value than sum insured, then the insured shall be considered as being their own insurer for the difference and shall bear a rateable proportion of the loss accordingly.
Underinsurance of a property can have serious consequences. Underinsurance means that the replacement value of the property or the value of the contents has been understated on the proposal, thereby lowering the premiums paid.
In an underinsurance situation, in the event of a claim, the loss adjuster will average the compensation paid. The principle of average means that the amount of the claim payment will be reduced proportionally if the property was not insured to the full amount of its replacement cost.
For example, if a fire causes €350,000 of partial damage, the building is insured for €1,000,000 but its true value is determined to be €2,000,000, the pay-out will be as follows;
Payout = Value of Claim x (Sum Insured ÷ Actual Value)
Payout = €350,000 x (€1,000,000 ÷ €2,000,000) = €175,000
This would leave the owner with an underinsurance shortfall of €175,000. In order to avoid both underinsurance and over insurance it is therefore essential to have your building insured for the correct sum or appropriate value at risk.