How to Make the Most of an Underinsured Loss

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Insurance policies contain a variety of language that provides additional coverage that will actually increase the policy limits or pay certain additional amounts regardless of policy limits.

...the repair or replacement of an item, then that part of the cost may be recoverable under the extra expense coverage in the policy instead of the property coverage.

Another example of creativity coming to the rescue in an underinsured claim comes from a real situation. Years ago, there was a small fire at the campaign headquarters of a U.S. Congressman. The office was underinsured, mainly because no one contemplated the cost of replacing build-out items such as carpet, ceiling tiles and paint, when the insurance was purchased.

Most commercial leases require the tenant to insure these build-out items. Businesses that rent office space commonly calculate risk based on their hard goods such as computers, desks and copiers.

In the case of the underinsured congressman, virtually all of his insurance recovery went to repairing/replacing“building” items such as the carpet and painting. In the fire, campaign posters and other literature were destroyed. After reviewing the policy, it was discovered that “valuable papers”were not defined. Some examples were included, but not a definition. The dictionary provided only a very broad definition. So the items were claimed as valuable papers. The insurance company immediately dismissed the argument. However, after the insured explained their position and supported it with the dictionary definition, as well as some case law regarding ambiguities in insurance contracts, the carrier acquiesced. This is a great example of how ambiguous policy language combined with a little creativity can minimize an underinsured loss.

Coinsurance

A third example of where creativity comes into play while calculating a claim is when the insured faces a potential coinsurance penalty. In those circumstances it may be more beneficial to opt to make an actual cash value (ACV) claim rather than a replacement cost claim, as the insured may net more money. This may seem counterintuitive, but if a policyholder is underinsured and they calculate their loss based on replacement cost, they may incur a penalty greater than what they lose by basing their claim on ACV. As a final note, be careful in reviewing and applying the coinsurance provision, as it is sometimes applied incorrectly.

4. Investigate the Potential for Third-Party Recovery

Many losses are caused by the negligence of third parties. This can be the result of anything from faulty wiring by an electrician to a defective lamp that overheats. Some losses may not be the result of a negligent person or a defective product, but they are magnified by them. For example, a defective smoke detector/sprinkler systemmay not cause a fire, but its failure to work will certainly increase the damages. When the loss is caused or compounded by the negligence of a third party, the insured may be entitled to recover the underinsured portion of the loss in a civil action (tort claim) against the negligent party (tortfeasor).

There are several things that must be considered if the insured is going to pursue a tort claim. First, they should consult with an attorney immediately...


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