Underinsurance means that the sum insured in the policy is below the actual value of the goods; in a partial loss, the insurer pays only in proportion of the sum insured to the value, under Art. 1462 of the Turkish Commercial Code (TTK). Overinsurance means that the sum insured exceeds the value; the excess part is invalid and the surplus premium is refunded. Overinsurance taken out in bad faith is entirely invalid.
Insured value and sum insured are not the same thing
The Turkish Commercial Code defines the two concepts separately. The insured value is the full value of the insured interest (TTK Art. 1460); for cargo, this is the actual value of the goods at the moment the insured event occurs. The sum insured is the amount written in the policy that represents the upper limit of the insurer's liability (TTK Art. 1461). If the two amounts are equal, there is full insurance; if the sum insured is lower, there is underinsurance; if it is higher, there is overinsurance. In cargo policies, the parties often agree the value in advance as a fixed amount; under TTK Art. 1464, in such a valued policy the agreed amount takes the place of the insured value between the parties.
How to set the right sum insured
The way to avoid underinsurance is to set the sum insured correctly from the outset. In practice, freight and insurance costs are added to the price of the goods to arrive at the CIF value, and 10 per cent is added on top for expected profit; duties and costs at destination are covered only if separately agreed in the policy. Item-by-item calculations and examples by delivery term are given in the entry on how the sum insured is determined.
How is compensation calculated in underinsurance?
Under TTK Art. 1462, if the sum insured is less than the insured value and part of the goods is damaged, the insurer pays, unless otherwise agreed, in proportion of the sum insured to the value. For a cargo with an insured value of 120 units and a sum insured of 90 units, a partial loss of 40 units results in a payment of 40 × 90 / 120 = 30 units; the remaining 10 units are borne by the insured. In the event of a total loss, the payment is limited to the sum insured itself, i.e. 90 units. If the policy has a deductible, this amount is also deducted.
| Situation | Definition | Consequence in a loss |
|---|---|---|
| Full insurance | Sum insured equals value | The loss is paid in full within the limit of the sum insured |
| Underinsurance | Sum insured below value | Proportional payment in a partial loss (TTK Art. 1462) |
| Overinsurance | Sum insured above value | The excess is invalid, surplus premium is refunded (TTK Art. 1463) |
Is writing a higher sum insured the solution?
No. Under no circumstances does the insurer pay more than the loss actually suffered (TTK Art. 1461). In overinsurance, the part of the sum insured exceeding the value is invalid; the sum insured and the premium are reduced and the surplus premium collected is refunded. Overinsurance taken out in bad faith with the aim of financial gain, however, is entirely invalid (TTK Art. 1463).
The 110 per cent requirement in letters of credit and Incoterms
Under Article 28 of UCP 600, if the letter of credit does not specify a percentage, the insurance document must cover at least 110 per cent of the CIF or CIP value of the goods; if this value cannot be determined from the documents, the higher of the amount of the drawing and the gross invoice value is used as the basis. An insurance document with an insufficient amount may be treated as a discrepancy at the bank. Incoterms 2020 also sets the minimum sum insured of the insurance to be taken out by the seller under CIF and CIP at 110 per cent of the contract price. For the document flow, see the entry on the letter of credit.
Where does underinsurance most often arise?
- Taking out the policy only for the FOB or EXW invoice amount; freight and the 10 per cent are left out, leading to a proportional deduction in a partial loss.
- Converting an invoice in foreign currency into Turkish lira at a fixed rate and writing the sum insured that way; if the exchange rate rises, the value exceeds the sum insured.
- Making declarations under an open cover policy with understated values.
- Not updating the sum insured after a price adjustment invoice or a shipment of additional parts.
How does Voltim Global support you?
Voltim Global does not issue policies itself; cargo insurance is arranged through partner insurance companies and agencies. When the transport is planned, the invoice, freight and delivery term data are passed on to the insurer in full, which makes it easier to set the sum insured according to the actual cost of the shipment.