In order to protect their financial interests, property owners take out insurance policies providing sufficient cover against loss of, or damage to the property. The insurance policy is usually contracted for a period of 12 months after which the insurer will renegotiate terms for the next period of insurance.
Prior to the start of each insurance period, certain items need to be confirmed. One such item is the sum insured or insured value. Most policies will include an escalation clause which allows for an increase in the insured value during the period of cover in accordance with inflation.
What happens when a property owner decides, during the period of insurance, to extend or improve their property by renovating or adding extra fixtures such as a swimming pool, and so increasing the replacement value? This may result in the property being under-insured and lead to an insufficient claim following a significant claim during that period.
Clearly, the first rule is that the responsibility to confirm the updated and correct insured value of the property rests solely with the property owner. The insurers have made allowances for the possibility of under-insurance due to periodic extension or improvement of insured property. This is done via the Capital Additions Clause which is included in most property insurance policies. The common limit of cover for capital additions is 15% of the insured value. This clause will normally include a condition that the insurer must be advised quarterly about any increase in value and that additional premiums due must be paid.
Capital additions constitute a small safety net; the insured should never be lulled into a false sense of security that this clause may possibly substitute the need for adequate and accurate property valuation.
Author: Bruce Gibson
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