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An expansion on your annual renewal letters
In the letters that we send out prior to your policy’s annual renewal, we encourage you to make sure that the contents of your house (and shop) are enrolled in your policy at a high enough value. Judging by the resulting policy changes, it is evident that some of you even read these letters. This is just as surprising as it is heartwarming and I commend you for it.
Our recommendation that items in your policy are valued high enough is not limited to only the contents of your buildings. What is limited, is the amount of space in our renewal letters; we can fit only so many recommendations on one sheet of paper. In this format however, space is nearly unlimited, and since some of you have made it clear that your appetite for reading material extends even to MUA correspondence, I am going to take advantage of that to expand on the aforementioned recommendations. So, in this newsletter, I will elaborate on why it is important that the values of items in your policy are kept up to date.
Because your premium is calculated as a percentage of your policy value, enrolling property in your policy at a value that is too low, means that you will underpay for coverage. This is good for you — until you suffer a loss on an undervalued item.
Loss payments on undervalued items are prorated, which means 1) that we do not pay out the full amount of a loss for which the policyholder has not been paying coverage at the full value and 2) the amount that we pay is not chosen at random. I will provide a couple examples of how this works.
Example 1
You have a tractor in your policy at $75,000 which due to inflation has ballooned to a fair market value of $100,000. A wind storm comes along, topples your auger, and it falls on your tractor’s hood, causing damage which costs $15,000 to repair. (For simplicity, we will not address the damage sustained to the auger.) When you submit the claim for the tractor repair, MUA is obligated to pay only 75% of the loss, ($11,250) because your were only paying 75% of what the premium should have been. The loss has been ‘prorated’ at 75%.
Example 2
You have tools in your tool trailer with a value of $45,000. When you first enrolled them, the tools took up barely any space in the trailer, and you could recall from memory the value of each one. The $15,000 for which they are enrolled in your policy was more than generous at that time, but now the trailer is nearly bursting at the seams.
One frosty night, some inconsiderate souls who seem to abhor a good night's sleep, break into the trailer and take a couple of the costlier tools, even though it is unlikely that they know how to use them. Your loss is $8,000, but fortunately, you are covered with MUA for $15,000. Or are you?
In reality, according to the rules (which are appended below) we are only obligated to pay 33% of the loss, ($2,666) as you were only paying premiums on 33% of the actual tool value. This loss would be prorated at 33%.
The 80% rule
There is another rule which we call the ‘80 percent rule’ that plays an important role in how losses are prorated. This rule states that if an item is listed in your policy at 80% of its actual value, it is considered fully covered.
This means that if the tractor from example 1 were in your policy at $80,000 rather than $75,000, the loss would be eligible for a full payment and no proration would be applied. In the event of a total loss, however, the loss payout size would be capped at $80,000. Proration is avoided on partial losses, but for total losses, the payout size does not exceed the value at which the lost property is enrolled.
Why do these rules exist?
The aim of proration is to promote fairness.
Consider that if I have a policy that includes only a house and household items, even if I pay into MUA for my entire life, I will only contribute to MUA approximately one tenth of what my house is worth. This means that if I submit a claim for a major loss, say a total fire loss of my house, MUA will necessarily pay toward that loss using premiums paid in by someone other than myself. This is often true in the case of major losses.
In light of this, it is perhaps a good idea to think of our premiums as the price we pay to have access to other people’s money in the event of a loss; and proration is the way we limit access to these funds when policyholders have not been paying the full price for this benefit. Lest the pro rata rule be applied too harshly, the ‘eighty percent rule’ softens it somewhat, and provides grace to accommodate some human error.
The rules being discussed are quoted below:
Article 5-A.13. When property such as household goods, shop contents, tools, etc. is entered in MUAC with a blanket valuation, it shall be entered at a valuation high enough to include all related property. If the total valuation is too low to cover all items, payment on partial losses will be prorated. (pg. 13 in Rules & Regulations)
Article 9-A.6. If and when properties are entered under partial valuation (80-100% is considered as full coverage), losses shall be paid accordingly. (pg. 18 in Rules & Regulations)