The Effects of Being Over or Under Insured

As the insurance market’s cycles pivot from favorable to unfavorable and everything in between, you should always keep a pulse on your coverage strategy to avoid being under or over-insured.
The effects of both circumstances could lead to unwanted situations and inconveniences. For example, if you’re underinsured, you might be financially liable for a situation you thought would be covered. If you buy too much coverage, then you’re likely paying extra money on unnecessary premiums.
With the economy and insurance market in a state of constant flux, proactively reviewing your insurance portfolio for coverage gaps and overlaps can help you optimize your risk management outcomes and financial investment in insurance. Here’s what you should consider.

Discovering the risks—under insured  

Because there are so many moving parts when buying insurance for the totality of your lifestyle, assets, and investments, oversights or simply not knowing what coverage to buy can lead to coverage gaps. These are some common scenarios that we’ve come across over time.

Homeowner’s insurance – Homeowner’s insurance policies are designated HO-1 through HO-8, with different numbers granting varying levels of coverage. Coverage generally falls into three main buckets of coverage: actual cash value (ACV), replacement cost, and guaranteed replacement value (GRV). ACVcovers the cost of your home and the value of your belongings after accounting for depreciation. This means that you’ll money for what the items are currently worth, not what you paid for them. Replacement cost covers the actual cash value of your home and possessions without deducting for depreciation. GRV is the most comprehensive, as it pays for whatever it costs to rebuild your home and replace your possessions, even if it exceeds your policy limit (to a certain extent).

When you purchase a policy with ACV coverage versus replacement cost or GRV, there might be a significant gap in what you have to pay to rebuild your home and replace items, with you having to pay for the difference out of pocket. It’s also important to maintain accurate valuations of your property to ensure that your policy limits are closely aligned with its actual value, as these numbers will fluctuate over time. Always be sure to review your policy with your insurance advisor for common exclusions that could lead to coverage gaps.

Collectibles and valuable assets – Most standard homeowner’s insurance policies will provide some level of coverage for collectibles and fine art, but they usually include sublimits and other exclusions for these types of items. You might need to purchase additional coverage to properly protect these valuables.

Additional structures – In the case of detached structures, such as garages, mailboxes, sheds, or fences, you’ll want to review your homeowner’s insurance policy to make sure it provides adequate coverage. These structures may not be covered, which could lead to a coverage gap.

Named perils – Though most standard homeowner’s insurance policies cover a wide array of weather events, they often exclude floods and earth movements. If you live in an area that is prone to these types of events and you haven’t purchased standalone coverage, this could lead to a coverage gap.

Umbrella coverage – Depending on your lifestyle, commitments, and assets, standard liability limits in homeowners and auto insurance policies may not be enough to cover you if you become the target of a lawsuit. To avoid a coverage gap, you’ll need to assess your overall net worth and future earning potential with your insurance advisor and purchase an umbrella policy with appropriate limits.

Homebased business – If you own and operate a company from your home, you’ll want to be sure that you have the right policies in place to protect your business operations from varying liabilities. Partnering with an insurance broker that has expertise in both personal and commercial insurance solutions can grant improved synchronicity in risk management for the overlapping areas of your life.

Discovering the risks – over insured

Though having ample insurance coverage is a good way to protect yourself, you also don’t want to overpay for coverage that you might not need. So, how can you tell if you’re over-insured? Here’s what you should keep in mind.

Excessive policy amounts – Your coverage amounts should be based on need, which is why we recommend regularly communicating with your insurance advisor about your lifestyle and assets, especially as they evolve. For example, if you offload assets, you might need less coverage. Keep valuations up to date to avoid purchasing coverage beyond the actual value or replacement cost of the asset.

Duplicate policies – If you don’t keep track of your insurance coverages, you might end up paying double for the same policy. For example, you could end up with multiple life insurance policies if you get coverage from your job and then purchase one on your own. Or if you buy car or home insurance before the previous policy ends, you’ll get charged for both policies. Additionally, if you have overlapping coverage and you experience a triggering event in which both policies would respond, there might be a delay for when you receive funds from the insurance companies as they negotiate who is the primary versus secondary payor.

Redundant coverage – When you’re considering buying new insurance for a specific situation, review your existing coverages with your insurance advisor to make sure that the risk isn’t already covered by other means. For example, if you’re considering adding roadside assistance to your auto insurance, it might be covered by an auto club membership or one of your credit cards.   

Unnecessary coverage – If the cost of your premiums exceeds the amount to replace the asset itself, then you might be able to forgo coverage. A common scenario where we see this is older cars and auto insurance. If you own an old, low-value car, comprehensive or collision coverage may not be worth the extra cost, especially if you have the means to replace or repair your vehicle.

Ways to prevent being under or over insured

Here are some steps you can take to avoid being under and over insured:

• Comb your insurance policies to determine what is and isn’t automatically covered. At times, your homeowner’s insurance will not cover the inside contents—only the property.
• For the contents of your home, you can purchase additional coverage to protect high-value assets, such as collectibles or electronics.
• Be sure to make and maintain a document that lists all assets, saving receipts as proof of value if possible.  
• As you work with your insurance advisor, consider bundling policies to get a discount, pay less in premiums, and minimize under-insuring your assets.
• Partner with an insurance advisor who regularly communicates with you and performs a thorough risk assessment to determine your exact coverage needed.
• Provide proper valuations, taking into account factors such as inflation.
• Review all your policies and identify what, if any, policies are redundant.

The best way to manage your insurance portfolio to avoid the coverage gaps and overlaps is to work with an experienced team who can help you navigate the nuances and complexities of insurance. If possible, having all your insurance coverages with the same broker can help better manage your needs as your risks evolve and eliminate communication issues that may arise if you’re working with more than one broker.

Connect with our team today for an insurance portfolio review to ensure you’re properly covered.