What is the difference between being underinsured and overinsured?

Being over-insured means you have higher insurance cover than you need. For example, the rebuild cost of your house is £400,000, but you insure it for £600,000. Being underinsured means you have less cover than needed to repair or rebuild your property or contents.

Will my insurer automatically tell me if I am underinsured?

No, your insurer won’t always tell you if you’re underinsured, as they rely on you providing them with accurate information to be able to assess the value of the cover you require.

How do index-linked insurance policies help prevent underinsurance?

Index-linked insurance policies help prevent underinsurance by adjusting your level of cover to reflect the wider economic environment. This means your cover will be updated annually based on the building cost index from the Building Cost Information Service (BCIS). Many home insurance policies are automatically index-linked to help policyholders avoid being underinsured (although this relies on the accuracy of the rebuild value you specify).

Can an insurer void my policy completely for underinsurance?

Generally speaking, underinsurance alone won’t cause your insurer to void your policy. However, it can lead to issues with claims, as explored earlier. Voiding a policy is a severe action, and insurers typically reserve it for more serious breaches. These include issues like misrepresentation or non-disclosure, where you have deliberately provided false information, withheld key facts, or misused your policy.

Understanding underinsurance | How can it affect me?

Guide to underinsurance

The right insurance provides a valuable safety net should the unexpected happen. But many policyholders are unknowingly underinsured, which means if you make a claim, the amount you receive could be less than you need, leaving you out of pocket. To stop you from getting caught out, we look at what underinsurance means, how it can happen, and what you can do to avoid it.

What is underinsurance?

Underinsurance is when the amount you’re insured for (the ‘sum insured’) isn’t sufficient to cover the cost of replacing your possessions or repairing or rebuilding your property. If you’re underinsured and make a claim, you could receive a significantly reduced payout, leaving you responsible for covering the rest.   

The opposite is overinsurance. This happens when your sum insured is more than the value of the items covered by your policy. If you’re overinsured, it means you could be paying higher premiums than you need to.

What is the ‘average clause’ and how does it work?

Many insurance policies include the ‘average clause’ (also known as the condition of average).

The average clause is a formula that allows your insurer to reduce your claim payout by the percentage you are underinsured by. For example:

Your home is insured for £250,000.

However, the cost to rebuild your home is actually £500,000. This means you’re underinsured by 50%.

Your home suffers a fire and causes £50,000 worth of damage, which you make a claim for.

As you are underinsured by 50%, your insurer can apply the average clause and reduce your payout by the same amount – in this example, by 50%.

This means the final payout you receive is £25,000, minus your excess. This leaves you to cover the remaining £25,000.

If you made a claim for a total loss, your insurer wouldn’t reduce your claim by the value of underinsurance, but the maximum you’d receive is your total sum insured.

The average clause might seem severe, but it’s a way for insurers to protect themselves from policyholders who might intentionally underinsure their property to pay a lower premium. Not all insurance policies include the average clause, but if they do, it should be clearly set out in your policy documents. 

To counteract this problem, many insurers offer home insurance policies which have a blanket sum insured. These policies provide cover up to a fixed amount, for example, £500,000 or £1 million. This is often more than enough for most properties, but you would still be responsible for providing an accurate sum insured figure and ensuring that the fixed amount is sufficient.

In some cases, a blanket policy may mean you end up overinsured. But it still may not be enough if you live in a high-value property, listed building, or your home is made from non-standard materials (like thatch, cob, stone, stainless steel). In these circumstances, you may need a tailored high-value home insurance policy instead.

What causes underinsurance in a residential property?

Few people intentionally underinsure their home, and the most common mistakes we see that lead to underinsurance are:

Confusing market value and rebuild cost

Market value is the amount your home could fetch on the open market. Your rebuild cost is how much it’ll cost to rebuild it from scratch.

The sum insured on your building insurance policy should reflect your home’s current rebuild cost. This amount can be higher or lower than its market value. For example, a new build property may have a higher market value than its rebuild cost, but an older property with more complex construction techniques may have a higher rebuild cost than its market value. This is why it’s important not to guess the figure.

To accurately estimate your home’s rebuild cost, remember to factor in hidden costs including fees for professionals (architects, surveyors), site clearance or demolition, and alternative accommodation.

Inflation and labour costs

In recent years, inflation has steadily increased the price of construction materials. Coupled with serious labour shortages in key trades such as bricklaying, plastering and carpentry, rebuild costs are rising, which should be factored into the sum insured in your buildings insurance policy.

If you haven’t reviewed the rebuild cost of your home recently, it’s important to double-check it before your next renewal.

If you’re worried about the impact of inflation, consider an index-linked home insurance policy. This means your sum insured will be adjusted in line with inflation. However, this is only useful if the sum insured you provide as a starting point is accurate.

Age and building type

The type of home you live in, and its age, can affect its rebuild cost. Typically, older properties or listed buildings made using traditional materials and construction techniques have a higher rebuild cost because of the need for specialist materials and labour. For example, a stone-built home could leave you underinsured.

Bespoke-built homes also risk being underinsured, particularly if they use non-standard materials such as steel or timber. Added sustainability features such as a green roof, extensive or complex renewable energy setups, or leisure facilities such as a pool or sauna can also increase your rebuild costs.

Home improvements, new purchases, and appreciated assets

If you add an extension to your property but don’t adjust the sum insured on your building insurance accordingly, you could be underinsured. 

Similarly, you can underinsure your possessions. For example, if you’ve bought an expensive new TV or sound system, remember to update your home contents policy to reflect these purchases.

Are your contents and valuables underinsured?

The average clause can also apply to the contents of your home, which can leave your personal belongings underinsured too.

Another aspect of contents insurance to consider carefully is the single article limit (also called the single item limit). This is the maximum amount of money you’ll receive for any one item, and it’s a point that policyholders can easily overlook. The limit varies by insurance provider, but it’s often set at around £2,500.

The single article limit typically affects items whose value increases (appreciates) over time, for example, jewellery, antiques, or art. For example, an engagement ring or premium watch bought ten years ago could be worth more now compared to when you purchased it. It may also be significantly higher than the single item limit of your contents insurance. Even if you’ve bought an item relatively recently, jewellery can change in value almost overnight as the value of precious metals fluctuates.

Your insurer may be able to increase your single article limit. However, if you have high-value jewellery, it could be worth considering a tailored home insurance policy with cover for jewellery and watch insurance which can provide you with more comprehensive protection.

The impact of underinsurance on businesses and landlords

When taking out commercial insurance, it is your duty to make a fair presentation of risk. If you are deemed underinsured when you make a claim, your insurer may reduce your claim in proportion to the higher premium they would’ve charged for the correct rebuild value, decline your claim entirely, void the policy, or add new terms to your policy.

It’s estimated that 71% of commercial properties are underinsured, leaving commercial landlords at risk of huge financial losses. If your portfolio includes offices or blocks of flats, check when the last valuation was and consider if you need an updated figure.

If you also run your own business from your commercial premises, make sure your contents are covered adequately too. The value of stock, equipment, and machinery can quickly add up if you’ve made capital investments or if you hold more stock at certain times of the year.

Business interruption insurance

Business interruption insurance covers lost income if operations come to an unexpected halt. One of the factors you’ll need to consider is the indemnity period – this is the maximum length of time your policy will pay out for.

It’s worth bearing in mind that supply chain delays can mean it takes far longer to get your business back up and running. With that in mind, it can often be more prudent to consider a longer indemnity period.

For more information, read our guide to business underinsurance.

How to avoid underinsurance

To help you avoid underinsuring your assets, we’ve put together this checklist:

Calculate your building insurance correctly

If you’re not sure if you’re underinsured, our self-check guide for homeowners can help you work out your rebuild cost. If you’re concerned about undervaluing your home and assets, an index-linked policy or a policy with a blanket sum insured could provide some reassurance.

Standard homes (made with conventional building materials) can be valued using the free Building Cost Information Service (BCIS) tool, commissioned by the Association of British Insurers (ABI). For non-standard properties, such as listed buildings or those made with unusual materials, we’d recommend getting a professional assessment from a chartered surveyor. 

Create a detailed contents inventory

Valuing your contents accurately can be time-consuming to start with, but getting it right will ensure your policy is based on an accurate inventory.

The simplest way to do this is to go through your home room by room, making a note of everything that you own and the current cost of replacing it from new. Make sure your inventory is kept up to date and regularly reviewed. Don’t forget everyday items like crockery, cutlery, towels, and even bed linen.

Identify and value your high-worth items

Almost all contents insurance policies will include a single article limit and a total limit for valuables, which is typically one third of the contents sum insured. Valuables include items made from gold and silver, watches, and works of art.

If you own items valued at more than the single article limit (or valuables which would collectively be above the total limit), you should let your broker or insurer know, as they will list these separately on your policy. It’s also worth considering getting a professional valuation for anything you’re unsure about, such as artwork. 

Review your policy annually

Try not to renew your policy without reviewing it. It’s recommended that you regularly assess the sums insured and consider the value of any new items you’ve purchased or changes you’ve made to your property which could impact this. Letting your insurer know as soon as you make new purchases can help ensure you have 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. 

Don’t run the risk of underinsuring your assets

Underinsuring your assets is easy to do, but you can avoid the risk by taking the time to review and update your policy regularly.

To find out more about our tailored home and landlord insurance policies, speak to an expert member of the team.

Speak to us: 01603 649650

Guide to underinsurance

In this article

In this article

What is underinsurance?

What is the ‘average clause’ and how does it work?