Sum Insured of $50,000 vs Market Value: Which is better for car owners?

Nowadays, most insurers do NOT specify a sum insured in the policy anymore.  Under the sum insured part, it simply says "Market Value".

Is this to the advantage of the insurance company or the insured (ie the car owner)?

Surprising as it may seem, this actually works to the advantage of the insured (the car owner)!

But haven't we been told: if the insurance company says market value, then the insurance company can pay any value.  No safeguard for the insured.  But if the policy says $50,000 as sum insured, then the insurance company has to pay $50,000, right?  WRONG!

Here is why....

One of the key reasons is that most motor insurance policies are policies of indemnity, ie the insured would be at most indemnified for his losses, and not more.  In other words, the insured cannot benefit from a claim.  This means the insurer at best will pay you market value of the item, in this case, the vehicle, at the time of loss.

Let us show via an illustration. If today, someone insured a vehicle for a value of $50,000 (it is specified in the policy explicitly). 2 months later, there is a bad accident and a total loss situation results. 

An independent surveyor (like an auditor) would assess the value of the vehicle at the point of loss. If the value is $48,000, the insurer will pay based on $48,000.

Conversely, if the value is $52,000, the insurer will ONLY pay $50,000 (the LOWER of the two!)

Suppose the policy states "market value" instead of $50,000. In the first situation when the surveyor finds that the market value is $48,000, the insurer would pay $48,000 - no change from the previous case.  However, in the second situation, the insurer would pay $52,000 and not just $50,000.

We understand why some insureds want a specified value in the policy because they might think, sometimes mistakenly, that this value is cast in concrete and the insurer has to pay this value in the case of a total loss claim. 

However, the insureds understand how the claims process works and how the market value is arrived at in the event of claim, the market value method might do them more good!

Clients of course will ask: what if they are not happy with the surveyed market value? Well, the client is free to engage another surveyor to survey and if the value is higher, the insurer will give it due consideration. 

In the event when the client and the insurer are truly NOT able to come to a mutually agreed value, the client still has the right to seek arbitration or bring the matter to the courts. The judge will then decide.

The above is true, whether or not a specified value is stated in the policy. The only thing here is: if there is a specified value, then the insurer will at MOST pay that value. If market value is specified, the insurer may end up paying more.

What is important to note that contrary to popular belief, even if there is a specified insured value in the policy, the insurer will NOT pay based on that value. By the principle of indemnity, the market value is the limit. 

To conclude, when a sum insured is being specified, the insured may overinsure but will NOT get more than the market value when it comes to claims.  On the other hand, when he underinsures, he would be paid a lower than market value when it comes to claims.

One reason why such policies are on indemnity basis is that it would allow the insured to intentionally make a claim to benefit.  Supposed if the policy pays based on sum insured strictly, without regard to market value.  Then a syndicate would go buy 1,000 cars at one go, say each at $50,000 and intentionally OVERINSURE by buying a motor insurance policy each for sum insured of $100,000 per car.  Then the syndicate arranges to crash all 1,000 cars and claims a total loss of $100,000 per car.  The profit margin is hence $50,000 per car.  That is a tidy $50 million profit for the entire exercise.  No doubt, the above scenario is hypothetical, but it is not impossible!