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Reviewed by William Cooper
Underinsurance has been a growing problem for a number of years. It is estimated that 70% of residential properties and 79% of commercial properties in the UK are underinsured.
In this article, we explain everything you need to know about underinsurance. What it is, how it happens, and how you can prevent it.
What is underinsurance?
Underinsurance occurs when you take out an insurance policy that doesn’t have enough cover, intentionally or not, for your specific needs. This means that in the event of a claim, you will be unable to claim for the full cost of the loss. Instead, you will only receive a percentage of the claim, or in some circumstances, the policy may be voided in entirety meaning you won’t receive anything for the claim.
Ultimately, underinsuring your property and contents can be very risky and can leave you facing a hefty bill if you suffer a loss.
How does underinsurance happen?
Underinsurance can happen several ways:
It’s a mistake
- You haven’t had your properties rebuild value appraised recently (or at all) and the rebuild figure you’re working with is out of date for the buildings section of the policy.
- You may have undertaken some home improvements and forgotten to update your insurer to factor this into the building sum insured section of your policy.
- It could also be a result of failing to factor in any new purchases for your home in your contents policy, especially high-value items, rendering your general contents or jewellery, luxury watch or artwork sums insured too low.
It’s intentional
- Sadly, it does happen. In an attempt to lower premiums, a policyholder fails to declare their sums insured correctly.
What are the risks of underinsurance?
As briefly touched on above, if you need to make a claim on your insurance policy, and you (or your insurer) discover that you are underinsured, they may decide to reduce the insurance payout you try to claim for. If the property is underinsured by a very large sum, they may void the policy altogether.
In some cases, they may apply an ‘average clause’ which means that they will only pay out a percentage of the claim in accordance with the percentage that you are underinsured by.
For example, a property may be insured for its market value (a common occurrence) at £400,000, when its actual reinstatement value is £800,000. If the building incurs £20,000 pounds worth of damage, the insurer is only obliged to pay out half the amount, as the full rebuild cost is underinsured by 50%.
How to prevent underinsurance
Step 1 – Create, or update, your contents inventory
Just like the buildings, your contents can fall victim to underinsurance. To prevent this potentially costly mistake, create an inventory of all the items that you own in your home. Think electronics, furniture, appliances, jewellery, clothing, collectibles, hobbies – it all slowly but surely adds up. In the event of a loss, having this record will make the claims process much smoother.
For high-value items such as a jewellery, watch or art collection, this is particularly important. Having a detailed list of high-value items can also make it easier for your broker to see if you’d be better suited towards a high-value home insurance policy. Our Home Inventory Blog explains why they can be helpful, and explains how to create a great one.
Step 2 – Get an accurate valuation to help calculate your rebuild cost
Getting an accurate rebuild cost can go a long way to making sure you are adequately insured. If you value your rebuild cost too low, you can be underinsured, whereas on the flip side, too high, and you can be paying more than you need to.
Calculating the rebuild costs is certainly an art form. It is the overall cost to rebuild your property from scratch in today’s economy. The rebuild cost is an amalgamation of many factors such as the size, location, type of property, how it’s constructed and what materials are used, the age of the property and even your VAT status.
We work closely with RebuildCostASSESSMENT.com, who offer discounted property valuations so you can have peace of mind that you have successfully found that sweet spot. Speak to your Stanhope representative today and we can guide you through it.
Step 3 – Keep in touch with your insurer
Looking to make any modifications to your home? Perhaps some renovation work or an extension? Before you start any work to improve your home, you should always reach out to your insurer or broker to ensure you have the right cover in place to protect you throughout. Failing to do so may have a negative impact on your policy and existing cover.
Avoid underinsurance with Stanhope
In the event that you wish to make a claim, having the right levels of cover for your property and content is imperative. If you don’t, and you are underinsured, you risk losing much more than you bargained for. Reach out to one of our friendly advisers today for assistance.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems, we recommend that professional advice be sought.
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