Did you know that millions of homeowners are likely to be underinsured? Over the last few years, a whole host of factors from COVID and Brexit to the war in Ukraine have increased construction costs, which have also been pushed up by soaring inflation rates. This has meant that, although house prices are falling, the cost of rebuilding a property is still rising. In this article, we look at what underinsurance is, how it can affect your home insurance and contents insurance cover, and what you can do to protect yourself.
- What is underinsurance?
- What is causing underinsurance in residential property?
- Is there a risk you’re underinsured?
- What are the consequences of underinsurance?
- What do I need to do to avoid underinsurance?
Underinsurance is when the amount you’re insured for (the sum insured), isn’t enough to cover the cost of repairing, replacing, or rebuilding the items listed on your policy. For example, if it would cost more to rebuild your house or replace its contents than the sum you’re insured for, you’re underinsured. Ultimately, this means you’d be responsible for meeting the shortfall.
There is a combination of problems causing underinsurance in residential property.
Firstly, workforce shortages are pushing up the price of labour and thus the cost of rebuilding. Before Brexit, EU workers made up 9% of the construction workforce. Current immigration rules are making it hard to replace these people.
Rebuilding costs have also been pushed up by the soaring cost of materials (25% higher in 2022 than they were in 2021). This has happened because of a variety of factors. After Britain left the EU, shipping materials from abroad become more complex and expensive. A post-pandemic surge in building projects meant that supply suddenly struggled to meet demand, pushing up prices. In addition, the war in Ukraine has meant fewer materials are available and supply chains have become disrupted.
There’s also the impact of inflation. In January 2023, the CPI inflation rate stood at just over 10%. A year earlier it was at just under 5.5%, while in January 2021 it was only 0.7%. The surge in inflation has pushed up building costs, even while house prices have been falling. Even if your house’s market value is less than it was a few months ago, the cost of rebuilding it will have gone up – leading to increased levels of underinsurance.
It’s also worth noting that inflation and the increased cost of many goods has caused underinsurance issues for contents as well as building insurance.
For most property owners in the UK, there is a high risk that you’re underinsured. And yet, only a very small proportion of people plan to increase the level of home insurance cover for rebuilding their property this year, despite inflation doubling in the last year. This could lead to millions of people being underinsured.
Some factors to consider when evaluating whether you’re underinsured:
- Is your sum insured based on market value? House prices have dropped by 4% in the last year, but according to the Building Cost Information Service (BCIS) the cost of rebuilding properties has soared by 19% during the same period. Insuring your home for its market value, rather than its rebuild cost, is the most common cause of underinsurance.
- Is your property listed? Rebuilding a listed building is generally much more expensive than rebuilding a property of standard construction methods. You may have to use difficult-to-source timber or stone, not to mention hiring expensive specialists using traditional techniques. In these cases, the rebuild cost of your home will be significantly higher.
- Have you improved, extended, remodelled, or renovated your home? All of these things can push up the cost of rebuilding your home and your home insurance needs to reflect this. Also, if you’ve created extra space, you may have filled it with new possessions – so check your contents insurance is still adequate.
- Have you accounted for hidden costs? Rebuilding a property costs more than just materials and labour. Have you factored in costs such as site clearance, demolition, architects, engineers, surveyors, and alternative accommodation while the work is taking place?
- When did you last value your contents? If you haven’t increased your contents insurance cover for a while, it’s worth revisiting this. Aside from the effect of inflation, you may need to account for new purchases and things you’ve been gifted or inherited. Also, if anyone has moved in with you since you last reviewed your contents cover, you’ll need to include their possessions in your insurance.
- Have you taken into account external features and buildings? Reinstating a property may require work on things like walls, fences, outbuildings, swimming pools, garages, and other features.
- Do you have a current valuation for high-value items? Possessions such as paintings, jewellery, sculpture, fine wine, classic cars, and antiques generally gain value over time. Make sure you have current valuations for any high-value items and that these are reflected in your contents insurance.
The consequences of being underinsured will depend on the terms of your policy, the most common outcomes are:
- Your insurer could reduce your payout in proportion with the premium you’ve paid – the amount by which will depend on their terms.
- If your insurer determines that the sum insured is drastically lower than what it should’ve been, and therefore that the risk has been misrepresented to them, they could void your policy altogether. In this instance you wouldn’t receive a payout at all.
- If your policy includes the average clause then they could reduce your payout by the percentage that you are underinsured. For example, if the sum insured on your policy is £250,000, but your property’s rebuild cost is £500,000, you would be underinsured by 50%. If you suffer a loss, such as a fire which causes £50,000 worth of damage, then your insurer will only pay out £25,000 (50%) under the terms of the average clause. If you need to rebuild your property entirely, the maximum the insurer would pay out would be £250,000 (based on the example above), leaving you vastly short of the £500,000 you need.
Essentially, if you’re underinsured you’re likely to receive less than you were expecting when you make a claim, leaving you to cover the shortfall.
First of all, you need to make sure your home is insured for its rebuild cost. If you’re not sure where to start, the BCIS rebuild cost calculator can help you with your calculations.
However, it’s also wise to get professional valuations and surveys to help you more accurately determine the rebuild cost. These will be particularly useful if you have undertaken renovations, remodelling, or added one or more extensions.
Once you have an accurate figure for rebuilding, you need to update your home insurance to reflect this. When it comes to renewal, index-linking means the sum you’re insured for remains as accurate as possible. However, index-linking only gives you a measure of protection against underinsurance if the sum you insured for originally was correct.
Similarly, when it comes to contents insurance, it’s wise to review your cover on a regular basis. Our contents insurance calculator is a good place to start. Remember that single article limits are likely to apply to home contents insurance. A single article limit is the maximum amount of money you’ll get for any one item. Typically, it’s set at around the £2,500 mark, which sounds like a lot but bear in mind items like engagement rings and bicycles often have a higher value.
If you own anything valued at more than the single article limit, you should let your insurer know as they will list this separately on your policy. Check with your insurer what your single article limit is to make sure you are covered for higher value items.
You can also ask your broker to look for a buildings and contents insurance policy which provides a blanket sum insured, which provides a safeguard against underinsurance. Typical policies cover up to £1m for the building, and £100k for the contents, which is normally more than enough for the average property. You would still need to provide the insurer with an accurate rebuild cost, though.
Even though house prices are falling, rebuilding costs are increasing at a rapid rate. As a result, millions of homeowners are running the risk of being underinsured. To protect yourself, make sure your home is insured for its rebuild cost, rather than its market value.
Similarly, with your contents insurance, get in the habit of making regular reviews of the value of your possessions. Some assets are rapidly increasing in value, so make sure you have the correct cover and properly adjusted single-item limits.
Contact Alan Boswell Group for more information about home insurance and home contents insurance on 01603 218000.