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How and who establishes the insured sum for property insurance policies?

When concluding a property insurance policy, regardless whether its subject matter is buildings or the content thereof, a very significant issue that each of us should be aware of is related to the accurate determination of the insured sum. We shall further detail this aspect, in order to relieve you from possible inconveniences in your interaction with the insurance field.
 
In practice, in order to determine the insured sum in property insurance, insurance companies (insurers) operate with two well-known concepts: the new replacement value – for assets, i.e. the reconstruction for buildings, and the real value representing the new replacement value minus tear and wear.
 
Choosing one of the two methods and establishing the insured sum are always the decision of the insured person, in other words yours, the person contracting the insurance policy. On the issuance of the policy, the insurer may perform a simple inspection in order to verify the insured assets, their maintenance condition and the guarding and security measures in place.
 
On the conclusion of the insurance contract, some insurers indicate, for guiding purposes only, to clients the reconstruction price of the insured building  so that the clients should be able to establish more precisely the insured sum, but they do not verify the accuracy of the insured sum and do not interfere with the determination of sum insured. Why?
 
Because, as we mentioned above, the person that should assure of the accuracy of the determined insured sum is you, the insured client. The insured sum is established at the level of reconstruction value for a building (of the dwelling or factory type) or new replacement value in case of an asset, such as for example a production machine or an electronic equipment.
 
How do we accurately establish the insured sum?
 
In order to precisely know the reconstruction value in case of a building that you want to insure, you may ask for the estimate of a constructor.
In case of an equipment, you may request an offer from the manufacturing company.
 
You may however use in all cases the services of an insurance consultant, who will not only explain to you in detail such concepts, but who will also customize the insurance solution according to your needs.


What else should be aware of?
 
The fact that the circumstance completely changes in case an insured risk occurs, e.g. the destruction of the building in a fire. Concretely, when an event occurrs,  both the value of the loss and the accuracy of the insured sum are assessed and this should be the value of the insured asset.
 
If further to the valuation, the insurer assesses that the insured sum declared on concluding the policy was lower than the new replacement value and respectively than the value that should have been insured, the damage is paid proportional to the underinsurance degree, according to the relation between the insured sum and the amount that should have been insured.
 
Why is declared an insured sum lower than the value which should have been declared? Because of the desire to pay a lower insurance premium, but if you do this, the consequences are clear in case of loss: the indemnity will not meet your expectations.
 
 
 
What should we understand about the manner in which insurance operates?
 
The fact that an insurance premium - even it seems high to you, but is established based on the value that should be insured for the concerned asset - represents the certainty that you will be indemnified at the value of the asset, building, etc. in case of a damage.
 
In order to understand how the value of the indemnity is determined in case you are underinsured (declare an insured amount lower than the value of the asset or property at the moment of contracting the policy), we shall further present a simulation.
 
Case-study
 
So, let’s say that a fire occurs in a building insured for Euro 1 million. The valuer of the damage assesses that the value of the repair is of Euro 150,000 and that the reconstruction value of the building at the moment of the damage was of Euro 2 million. The indemnity that shall be paid is of Euro 75,000 because it shall be calculated as follows: 150,000 x (1,000,000 : 2,000,000) = EUR 75,000.
 
This situation is called underinsurance, as we mentioned above, and the method of determining the indemnity is known as the proportionality rule. In other words, the underinsurance proportionally reduces the indemnity amount .
 
In lieu of conclusions
 
The insured client is liable to determine the insured sum and the accurate determination thereof is extremely important, so that in case a damage occurs, the indemnity should be adequate. Thus, what you, as an insured client, can do on concluding the policy is to inform yourself very well in regard to the value necessary to replace the concerned asset or to reconstruct such in case of buildings and based on such information, you should determine the accurate amount.