Underinsurance, Claims & Excess – The Risks Most Owners Don’t Understand
One of the biggest risks in community schemes is not lack of insurance – it’s incorrect insurance.
What is underinsurance?
Underinsurance happens when the sum insured is lower than the true replacement value of the buildings.
This often occurs because:
- valuations are outdated
- building costs increase faster than inflation
- improvements are not declared
Industry insight shared: many schemes are underinsured by 20% or more.
What is “Average” and why is it dangerous?
Average is the reduction an insurer applies when the sum insured is below replacement value. In sectional title the policy must apply that reduction only to the underinsured unit or exclusive-use area, not to the buildings as a whole. If a unit is worth R1 million and is insured for R800,000, an R100,000 claim on that unit can be cut to R80,000. The owner of that unit carries the gap. Common property should not be scaled down because the scheme total is short. That protection only exists if the policy is written to match PMR 23(1)(c).
How often should valuations be done?
Regularly at least every 3 years and especially when:
- construction costs increase
- major upgrades are done
- insurance is renewed
Why are geysers such a big issue in schemes?
Geysers are one of the highest-frequency claim drivers.
The webinar highlighted:
- ~70% of claims are geyser-related (excluding resultant damage)
- they often cause secondary damage( resultant damage) to ceilings, flooring, cupboards, etc.
How do claims affect premiums?
High claim volumes (loss ratios) can result in:
- higher premiums
- increased excesses
- stricter policy conditions
- reduced insurer appetite (harder to insure)
What is an excess?
An excess is the portion of an insurance claim that is not paid by the insurer and must be covered by the insured party when a claim is approved.
It is a fixed amount (or sometimes a percentage) specified in the insurance policy and applies to each claim.
How does an excess work?
If a claim is approved:
- The insurer pays the claim minus the excess
- The excess is paid by either the owner or the Body Corporate, depending on responsibility
Example:
- Claim amount: R20,000
- Excess: R3,000
- Insurer pays: R17,000
- Excess of R3,000 is payable by the responsible party
Why does an excess exist?
Excesses:
- discourage minor or unnecessary claims
- encourage proper maintenance and risk management
- help control insurance premiums for the scheme
Sectional Title (general principle):
- If damage relates to what the owner must maintain → owner pays
- If common property → Body Corporate pays (may recover from owner)
HOA:
- Scheme policy usually covers common property only
- Owners insure their own homes and pay their own excess
Key takeaway
- An excess is not an additional charge – it is your share of the risk in any insurance claim.
Should you always claim?
No. It may be better NOT to claim if:
- the cost is close to the excess
- it’s maintenance-related
- it may negatively impact the scheme’s claims history
- it’s minor and manageable internally
Key Takeaway
The biggest financial risk is not the incident – it’s the gap between what’s insured and what must actually be paid.