Risks of Under-Insurance
Top 5 tips
- If you need to make a claim you could well be left out of pocket.
- Your insurer may cancel your policy completely or may impose a penalty by reducing its liability for a claim.
- When buying home or contents insurance do not under estimate all the costs involved to rebuild your home or replace your belongings.
- Do not rely on the market value of your house when estimating the insurance coverage needed.
- Make sure you inform your insurer without delay if the value of your property, stock or contents changes.
What is under-insurance?
This is when something is insured for less than its true value, meaning that you have inadequate insurance coverage.
Under-insurance is a common problem in relation to household insurance (for insuring the contents within a home or the property itself), but can equally arise when insuring the stock in a business or warehouse.
Why does it matter?
In the event that you are under-insured and you did need to make a claim, your insurer may ‘void’ the policy, that is cancel the policy altogether, by refunding all premiums paid. They may even recall any money paid out for previous claims.
Alternatively, you may receive a reduced pay-out. Policies commonly include an ‘average clause’, which means that the insurer can reduce its liability for a claim by applying a proportionate settlement, or ‘apply average’. If the average is applied the amount paid will have the same proportion to the actual loss, as the sum insured has to the full value of the property.
For example, you insure your house for £100,000. However, the full cost to rebuild your house is actually £150,000. In this case you have only insured a proportion (2/3rds) of the rebuild cost. If there is then a fire, and the repair costs are £60,000, the insurer will only pay £40,000 or 2/3rds of your claim for the repair costs of £60,000. This is because you only insured the house for 2/3rds of the cost of rebuilding it.
How can you avoid being under-insured?
Before providing you with a quote your insurer will want to know the cost of replacing the contents of a property or business and/or the cost of rebuilding the property. Very often the insurer will rely on the estimate you provide for replacing the whole of the contents and/or the cost of rebuilding the property building, instead of carrying out a site visit.
Ensure that you do not underestimate how much it would cost to replace your personal possessions, and do not rely on the market value of your house when estimating the amount it should be insured for. You should also consider any other costs arising, for instance the cost of clearing and transporting any damaged or soiled stock, or any potential rent costs that would be incurred.
Remember, your home is your biggest asset, therefore make sure it is properly insured. Answer any questions from your insurance company truthfully, and be specific as to what you want covered. You might even consider taking photographs or video of your home and contents, but if you do, make sure you keep copies of these off the premises.
Finally, remember that valuations can change, for example, gold costs. Therefore it is important to inform your insurer, either at the time of renewal, or whenever you become aware, of any changes to the value of your property, stock or contents. Some policies may automatically increase the value of the items insured by a set percentage each year or in line with inflation.