Many people believe that if you insure your tools for $7,000 then you'll be covered for up to $7,000 in the event of a claim. This is true if your tools are worth $7,000, but not if they're worth less - or more - than that.

If you can only show reasonable evidence of owning $5,000 worth of tools then the insurer will only pay you $5,000, which is fair enough.

But if your tools are valued at $14,000 and insured for $7,000, even if only $7,000 worth of tools are stolen you won't be paid the full amount.

What the..?

It's called underinsurance, and here's how it works:

If your tools are worth $14,000 and you insure them for only $7,000, effectively you are only insuring 50% of your tools. And here's the thing - you can't choose which 50% of your tools you are insuring.

So if $7,000 worth of your tools were stolen, you couldn't claim for 100% of those tools - you could only claim for 50% of them. So your $7,000 policy will only pay you $3,500 and you'll be left another $3,500 out of pocket.

It's not just tool insurance that works like this, you will also find that most building and contents policies in Australia work in exactly the same way.

How do I avoid this problem?

The solution is quite simple - just make sure that all of your tools are insured for their full replacement value. If you're not sure of their exact value, it would be better to go a little bit over rather than under, just to be safe.

What else can I do?

It's also a good idea to maintain a register of all of your tools. Where possible, it is a good idea to retain receipts or invoices for all tools purchased, which you should be doing for tax purposes anyway.

Where receipts are not available, other evidence required by an insurer may include original boxes, instruction booklets, photos or other evidence which could reasonably show that the tools did belong to you prior to the loss or theft.

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