Sum insured

What it means

The sum insured is the ceiling on what the insurer pays. It is set in the policy and, with the excess, drives the premium more than anything else.

For property it should equal replacement value. For liability cover it is chosen by the size of harm the company could cause, not by its turnover.

The sum insured should not be confused with the premium: the sum is the ceiling on the payout, the premium is the price the company pays for cover. The limit of indemnity is different again, capping the payout per event or per year regardless of what the assets are worth. Liability policies often show both side by side.

How it works in practice

Review it once a year at renewal. Over three years construction and equipment prices move enough that the original figure stops being adequate although nothing in the assets changed.

With many items an aggregate sum with inner limits can be agreed. Know which limit applies to stock, electronics and glass, because cover there is capped differently.

Some insurers offer automatic indexation of the sum insured. Even so, at renewal we compare the sum with the acquisition cost of the past year’s purchases, because indexation raises old figures but will not add a new machine or new equipment to the policy by itself.

What to watch out for

Underinsurance reduces the payout proportionally even on a small loss. Overinsurance means paying premium for an amount that will never be paid: indemnity follows actual value, not the contract figure.

Insurers normally pay a VAT payer net of tax, since the company deducts the VAT on the repair. A non-payer needs a sum including VAT, or it will receive less than the repair costs. After registering for VAT or after VAT deregistration the sums insured are worth checking.