No one wants to discover they’re not fully covered when they’re already dealing with the stress of making a claim. But that’s exactly what can happen if your home, belongings or business are insured for less than they’re worth.
In this guide, we’ll explain what underinsurance means, how it can happen, and the simple steps you can take to help make sure your cover keeps pace with your needs.
EASY AS HACK
Keeping insurance values up to date for your home or new items, can help ensure you have enough insurance cover in place. Don't forget to factor in rebuilding costs which have risen, home improvements and valuable items.
At a Glance
Keeping your insurance cover up to date can help protect you from unexpected costs if you ever need to make a claim. It’s worth reviewing the amount you’re covered for after home improvements, major purchases, or significant changes in rebuilding costs.
What is underinsurance?
Underinsurance happens when the amount you’re insured for is lower than the true cost of repairing, replacing or rebuilding what’s covered by your policy.
For homeowners, it’s important to remember that your property’s rebuild cost is not the same as its market value. The rebuild cost is what it would cost to rebuild your home from the ground up if it was seriously damaged or destroyed.
If your cover doesn't reflect the true value of what's insured, you could find yourself having to make up the difference if you need to claim.
How does underinsurance happen?
Underinsurance can happen for several reasons, including:
- Home improvements or renovations increasing the value of your property.
- Rising construction, labour and material costs over time.
- New purchases that haven't been included in your contents cover.
- Underestimating the value of personal belongings, stock or equipment.
- Not reviewing your policy regularly as your circumstances change.
- Forgetting to update the value of the contents insured or the property value for several years.
- Calculating property value based on the sale price rather than the cost to rebuild.
Head to How to calculate the rebuild cost of your home.
Risks of being underinsured
Being underinsured could leave you out of pocket if you need to make a claim. If your cover isn't enough to meet the cost of repairing your home or replacing your belongings, you may need to pay the difference yourself.
A fire, flood or burglary is the worst time to discover you're underinsured, so it's important to review your cover regularly and keep it up to date.
How to avoid underinsurance
Here’s how you make sure you have enough cover for your needs:
- Be sure to regularly work out the total value of your home’s contents, taking current market prices into account rather than just what you originally paid. Have any jewellery items valued separately by a professional and keep an up-to-date list of your belongings along with photos if you can. Review and update it each year, or whenever you make a major purchase.
- To value the rebuild cost of your home for buildings insurance, you can use an online calculator or ask a chartered surveyor to assess it for you.
- Renovation updates – be sure to tell your insurer right away if you extend or make major upgrades to your property.
- Take a look at your policy schedule or statement of fact to make sure that the sum insured is enough to cover the replacement costs of your belongings.
Find out what rising prices do to your property’s rebuild value.
How to calculate underinsurance
If you're underinsured, your insurer may apply the average clause when assessing your claim. This means that if the amount you're insured for is less than the true value of your property or belongings, any payout could be reduced by the same percentage.
Here's how an underinsurance calculation works when the average clause is activated:
- You've insured your home contents for £40,000. A burst pipe causes flooding in your home, damaging rugs, electrical items and other belongings.
- The cost of replacing the damaged items comes to £15,000 for which you make a claim with your insurer.
- When the insurer checks your claim, they find that the total value of your contents is £50,000, meaning you've insured them for only 80% of their value.
- Since you’re underinsured by 20%, the average clause kicks in. The insurer cuts your payout by that same percentage.1
- Instead of receiving the full £15,000, you receive £12,000 (20% less).
- This means you'll need to pay the remaining £3,000 towards replacing your belongings yourself.
The Financial Ombudsman Service explains that insurers may deal with underinsurance in different ways, so it's important to understand how your policy works.
Some insurers may use an approach called proportionate remedy. This means they work out how much you would have had to pay to insure your buildings or contents in full. Then, they compare this with the premium you paid and may reduce any claim payment by the same percentage.
Let’s say all your belongings are worth £100,000, but you’ve only insured them for £50,000. When you make a claim, the insurer works out the level of cover needed to insure your belongings for their full value and how much the cost for that cover would have been.
For example:
- You paid £300 a year for your insurance.
- The insurer says you would need £500 a year to cover everything properly.
- £300 is 60% of £500.
Because you only paid 60% of the cover you needed, the insurer will only pay 60% of the claim.
So, if you make a claim for £50,000:
- The insurer pays £30,000 (60%).
- You pay the remaining £20,000.
What to do if you think you are underinsured
If you think you might be underinsured, it’s important to update your cover right away.
- Make sure you use the right valuation tools, so you always have the most up-to-date values for your belongings.
- Remember to update your insurance cover to match the latest replacement or rebuild costs.
- Tell your insurer about home improvements, like an extension, before your policy renews.
- Take another look at your cover whenever you buy or renew your insurance.
- Be sure to tell your insurer of any changes affecting your policy – not doing so may lead to your policy being cancelled, your claims being rejected or not paid in full.
Get a home insurance quote
Learn more about Ageas home insurance and get a home insurance quote.
FAQs
What is the difference between underinsured and uninsured?
Here are the differences between underinsured and uninsured:
- Underinsured means you have insurance, but it doesn’t cover the value of the things you’re insuring.
- Uninsured means you don’t have any insurance.
What does ‘sum insured’ mean?
The sum insured means the maximum amount your insurance provider will pay if you make a valid claim, and you’ll usually find this limit listed in your policy documents.
What is the average rule?
The average rule comes into play when something is insured for less than its actual worth. If this happens, the insurer can reduce the claim payment by the same percentage that the item or property was underinsured.2
What is an average clause?
The average clause basically puts that principle into action by lowering your payout if your asset is underinsured.1
What happens if you’re underinsured?
If you’re underinsured:
- Your belongings and home won’t be fully covered.
- Your insurer might use an average clause, which means they’ll only some of your claim.
- In some cases, an insurer may reduce or decline a payout.
Sources
2. https://www.gov.uk/hmrc-internal-manuals/general-insurance-manual/gim99999
