How to avoid an average insurance outcome

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While some variations in the types of coverage that exist between different business insurance packages available to optometrists are only cosmetic, there are some that can have a far greater impact on a potential claim settlement.

One of the least commonly understood, but most potentially devastating variations is the application of the ‘averages’ clause commonly found in property insurance policies of all kinds, including home insurance policies.

Most customers take it for granted that if they are underinsured, should a claim arise – as long as the claim is below the total sum insured – the insurer will pay in full. Due to the ‘averages’ clause, not only is this is a popular misconception, it has the potential to cost you dearly. Taking a gamble on underinsuring your business can leave you seriously out of pocket.

For more information on the finer details and potential consequences of underinsurance and the ‘averages’ clause, you can refer to our article here.

In the article, Guild explains the benefits of having a Reinstatement Plus basis of settlement, and the application of the dreaded ‘averages’ clause.

To give you a quick recap, Guild’s Reinstatement Plus provides protection on two fronts:

1. It means that your business insurance policy does not include an averages clause, reducing the risk of an out of pocket expense.
2. The policy holder receives a 50 per cent increase of the sum insured providing an additional safety net that reduces the chance of underinsurance.

First-hand experience

Recently, an Optometry Australia member learned first-hand the importance of Guild’s Reinstatement Plus feature, and how it protects you in real life.

The Circumstances:
An optometrist was leasing approximately 80 square meters of space in a shopping centre. One very early morning they received a phone call that every business owner dreads: a fire in an adjoining shop had caused extensive damage to their business.

The optometrist had a contents sum insured value on his policy of $198,000 and a Business Interruption (BI) sum insured at $160,000. Upon review it was discovered that the actual sum insured for contents should have been $320,000 – and was underinsured by $122,000.

The Assessed Loss:
Damages to the office including fit-out, eye testing equipment and stock was assessed at approximately $300,000 and the BI loss at $140,000.

The Claim Settlement:
Being underinsured by $122,000 would normally bring the ‘averages’ clause into play when calculating the settlement. For the optometrist this would have meant a less than anticipated settlement of $184,000, meaning that the optometrist would have to pay out an additional $116,000 to cover their losses, at a time when the business was not operating.

Essentially, in the event of any loss, other insurers will evaluate the sum insured against the actual cost of restoring the entire business and calculate if the sum insured was acceptable. If the business is underinsured, any claim amount paid will be lowered by the same percentage.

Instead, as the optometrist was insured with Guild, their actual settlement was assessed as:

• $198,000 + $99,000 (50 per cent uplift of the actual sum insured) = $297,000
• Averages clause does not apply.

Instead of facing a $116,000 shortfall in the claim settlement, Guild’s Reinstatement Plus basis of settlement provided all but $3,000 of the total assessed loss which enabled the optometrist to get his business back up and operating.

Not only is there a significant financial benefit to the insured in the event of a loss – the policy provides a ‘safety net’ cover of 50 per cent – it also acts as a hedge against being underinsured.

The true value of having the right insurance cover can really only be experienced at the time of a claim. In this instance, during renewal the optometrist was offered a competing product at a $500 discount to what he was paying with Guild. As that competing policy did not include ‘Reinstatement Plus’, a $500 premium saving pales significantly by comparison to a $116,000 loss. It’s essential to remember when considering the best insurance policy for you, premium is only one small part of the much larger equation.

Visit Guild’s Member Portal for insurance information and advice.

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