Does a higher sum insured guarantee higher claim settlement under home insurance? No, a higher sum insured doesn’t mean you will get a higher claim settlement.
On the contrary, there have been instances when a home insurance company has refused to settle a claim despite the sum insured being high. The amount settled could also be lesser than the sum insured.
Moreover, there are clauses like deductibles that require one to pay before the insurer settles the claim.
Risk of over insurance
Two policies for a single item is an instance of over insurance. For instance, your refrigerator may be covered under the home insurance policy as well as content insurance. Sellers of household appliances often provide insurance cover for items bought from them.
Another example of over-insurance could be an overvaluation or change in the price of the property over the years. This means you might have bought comprehensive home insurance that covers your content as well. However, at the time of purchase, the item could have had a higher value but prices may have since gone down.
Moreover, a home insurance policy pays for the damage or loss as per the item’s market value. Hence, if a property gets cheaper due to advancement in technology the replacement cost will come down irrespective of the sum insured amount.
Principle of indemnity
Importantly, if the insurance company pays more than the actual loss it would be against the principle of indemnity. The idea is that a policyholder should get what the actual loss is or less than that. In any case, it can’t be more than the loss. Insurance does not allow you to profit from an insured event. It only covers your actual costs. This is called the process of indemnification.
Policyholders should avoid buying different policies for the same item to avoid paying more than the insurance coverage amount.
Ravish Kumar, 30, buys a house for Rs 50 lakh last year. He and his wife furnish the house with costly appliances and a luxurious sofa set. Kumar also purchased a silver Ganesh plate to decorate the drawing-room.
Unfortunately, two weeks after the couple moved in heavy rains damaged the house. Ravish incurred a total loss of Rs 10 lakh.
Since Ravish had bought a home insurance policy the insurer asked him for documents like the duly-filled insurance form and the valuation certificate to initiate the claim.
The insurer found Ravish had bought content insurance for his silver plate from the jeweler. Ravish could get the claim amount either from the insurer or the jeweler. He was not allowed to get more than the actual loss even if he had coverage for the silver plate under two policies. Therefore, although his sum insured was high the claim was settled as per the market value. This is also fair from Ravish’s perspective because the purpose of insurance is to cover losses and not to make a profit.