Insurance is a valuable safety net and can help you get things back in order if the unexpected happens. With that in mind, it’s vital to ensure you have the right level of cover for your needs.
Many policyholders unwittingly end up underinsured, in fact, it is estimated that 80% of UK properties are underinsured. This means that if you come to claim, the amount you receive could be just a fraction of what you need – leaving you considerably out of pocket.
To ensure you don’t get caught out, here’s how to avoid underinsuring your assets and what the consequences could be if you do.
- What is underinsurance?
- Why does underinsurance happen?
- The consequences of underinsurance
- How 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. Ultimately, that means you’d be responsible for meeting the shortfall yourself.
You can be underinsured for a number of reasons, but one of the main causes is simply underestimating the true value of what you own.
A good example is contents insurance, which should cover the cost of repairing or replacing all your possessions at home. This includes items most of us take for granted (which makes them easy to forget), such as carpets and rugs. Your contents policy should also include belongings kept in sheds like a lawn mower and garden tools – all of which can add up.
Similarly, buildings insurance should be enough to rebuild your home if it were completely destroyed. Remember that the rebuild cost is not the same as the market value of your property. For example, if your home is listed and needs specialist materials and labour, the cost to rebuild it could be considerably more than its market price depending on where you live. Additionally, you need to factor in the costs of hiring professionals like architects and surveyors, the cost of demolition, debris removal and finding alternative accommodation for the duration of the work.
Automatically renewing your policy without reviewing it can also leave you underinsured. For instance, if you’ve bought an expensive new TV or sound system but haven’t updated your home contents policy to reflect your purchases. The same can happen if you choose to modify your car or van, if you don’t tell your insurer, you’re unlikely to be compensated for the alterations and may face the policy being avoided.
The worth of higher value items, such as jewellery and artwork, will often outstrip the cost of inflation and so it is important to have these revalued every 3-5 years to make sure their cost is accurately reflected in your policy.
In some instances, a policyholder might decide to purposely underinsure their assets with the aim of getting a lower premium. This is because the sum insured often impacts what you pay for your policy – the higher it is, the pricier the premium and vice versa. However, this can have serious ramifications if you come to claim and find that you are not covered for the amount you need, or the insurer avoids the policy due to the misrepresentation.
If you’re underinsured, it’s not as simple as getting a little less compensation. Instead, it can lead to an even greater gap between what you need and what you’re given. This is because some insurers apply the average clause.
What is the average clause?
Essentially, the average clause allows your insurer to reduce your payout by the percentage you are underinsured.
For example, let’s say your home is insured for £250,000 but its actual value is £500,000, then you would be underinsured by 50%. If you suffer a loss, such as a fire which causes £50,000 worth of damage then, using the average clause, your insurer would only pay out £25,000.
Don’t forget – you’ll also need to pay the excess before any claim can go ahead, so the final payout is likely to be even lower.
The average clause might seem unfair, but it’s a way for insurers to protect themselves from policyholders who might intentionally underinsure their property. Not all insurers use the average clause, but if they do it should be clearly set out in your policy documents.
Another serious consequence of underinsurance is that your insurer can refuse to pay out anything at all. Insurers often call this an ‘avoided’ policy because they treat the policy as if it never existed.
Insurers are allowed to do this if you haven’t disclosed relevant information about the value of your assets – such as intentionally underinsuring or misrepresenting what they’re worth.
Most examples of underinsurance stem from underestimating the value of what you have, whether that’s your home, personal possessions, business, car or van. That said, there are all sorts of ways to ensure you don’t get caught out, including:
Valuing your contents accurately
This can be time consuming to start with, but getting it right ensures future policies will be based on an accurate inventory. The best way to do this is to go through your house, room by room making a note of everything that you own. Make sure that your inventory is kept up-to-date and regularly reviewed. Don’t forget all those everyday items like crockery, cutlery, towels, and even bed linen.
Getting a professional valuation
If you have any antique or precious items, a professional valuation can minimise the risk of underinsuring them. As well as jewellery, artwork and family heirlooms, remember things like musical instruments too, which can be very expensive to replace.
Being mindful of the single article limit
Almost all home contents insurance include a single article limit. This 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 can 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.
Reviewing your needs and updating your policy
Try not to let your policy roll over. Regularly review the sums insured and consider the value of any items you’ve bought that might need adding. Letting your insurer know as and when you make new purchases can help ensure you’ve got enough cover at all times.
If you’re looking at updating a business policy, consider your stock levels throughout the year. If you take on seasonal stock, check that your policy reflects the value of what you keep on the premises.
Read more: Guide to moving house insurance.
Making use of online calculators
If you’re struggling to work out the rebuild value of your home there are online calculators you can use which provide a guide. Try using the Building Cost Information Service (BCIS) tool, from both the Association of British Insurers (ABI) and the Royal Institution of Chartered Surveyors (RICS)
Don’t run the risk of underinsuring your assets
We understand just how easy it is to slip into the trap of underinsurance, but taking a little time to review and update your policy on a regular basis can minimise the stress and anxiety of not getting the compensation you need.
For advice and guidance on a range of products to cover your needs, take a look at our personal insurance, business insurance, and landlord insurance services. You can also speak to an expert directly by calling our friendly and experienced team on 01603 218000.
Read more: What is an insurance broker?