Over insurance is a situation that arise when an party buys more coverage than the actual cash value of the property being insured.
For example, a house might be worth $250,000 with a similar replacement cost, but the amount of coverage purchased by the homeowner goes up to $500,000. This also essentially means that the client has been paying premiums for an additional $250,000 for no particular reason.
While some people might see this as a simple case of being safe rather than sorry, it can send all the wrong signals to an insurance company.
This is because it is not logical to protect a $250,000 investment for $500,000.
A sinister way to look at this is that the insured has an intention to profit from the policy through excessive claims, and even possibly false claims.
So it’s not surprising to find insurers sitting up and paying more attention when a person has purchased more coverage in excess of a property’s cash value.
Legitimate justifications for overinsurance
Over insurance is common with property insurance policies. And for good reason.
This is because property generally appreciate in value. Even in static real estate markets, inflation can drag property value upwards.
As homeowners are unable to clearly forecast value appreciation, the prudent way to protect their homes from total loss is to buy more insurance coverage then the current value of the house.
While it can be argued that homeowners can conduct annual reviews on their policies and purchase more coverage when necessary, this is something that is easier said than done.
Just like how people know that they should probably avoid soft drinks and alcohol for better health. But few actually follow through on it.
On top of that, consumers are often advised to be prudent with their personal finances and to manage their risks. So buying more insurance than an asset’s fair reasonable value can be deemed as just an act of prudence.
Preventing over insurance
While one might gain unnecessary attention from insurers for over-insuring themselves, this should not be the main reason why one should avoid this situation in the first place.
Consider that you would be paying premium for coverage that you would never get to claiming when you are over-insured.
This is money that can go towards other insurance plans in other aspects of life.
So to avoid these circumstances from arising, carefully studying the terms and conditions policies to see how insurers define over insurance is a must.
The goal should never be to buy above what you need. But to buy the right amount of coverage to prevent wastage.
In terms of property, aiming for an amount of coverage for it’s market value is a benchmark reference point to use.
In addition, take note that how much you value personal property can be different from how much insurers value them. Owners would inevitably put as high value to their property, while insurance companies would use a more conservative approach.
This is another big reason why people over-insure.
With this in mind, check with your insurer on their computed replacement costs can go a long way towards buying the right amount of coverage for personal and real property.
