The hidden danger: understanding underinsurance

Introduction

When you take out a home insurance policy, you’ll be asked to provide the value of your home and contents. While you might think a rough estimate will do, providing an accurate figure is more important than you think.

If you underestimate the true value of your home, you could be left significantly out of pocket if you ever need to make a claim. In worst case scenarios, you might even have your policy revoked.

And it’s surprisingly common – an estimated 68% of residential properties are underinsured (rebuildcostassessment.com).

Why does it happen?

Underinsurance is often accidental, though in rare cases it’s done intentionally to knock down the price of the home insurance policy. The most common causes of underinsurance are:

• Underestimating your rebuild cost: Many homeowners confuse their property’s market value with its rebuild cost. This is how much it would cost to demolish your property, clear the land and build it again (including the cost of labour). Insurers use your property and rebuild cost when working out your cover level, and it can be significantly higher than the market value of your property.
• Using an outdated valuation: You might assume that the rebuild cost of your home will stay the same as when you first filled out your insurance details, but this is rarely the case. From inflation on construction materials to increased labour costs, your rebuild cost could differ dramatically year on year.
• Underestimating the value of your contents: When you have so many possessions, from everyday items to electronics and clothing, it's easy to underestimate the total value of everything in your home. You should look at replacement cost (how much it would cost you to buy the same thing again today) rather than the price you paid originally.
• Forgetting to account for home improvements and new purchases: Significant renovations, extensions, or buying high-value items (new jewellery, art, or furniture) can quickly increase your property's overall value. If you don’t inform your insurer, this could leave a big gap in your cover.

What are the consequences of underinsurance?

Your insurer might pay less when you make a claim

Have you ever heard of the ‘average clause’? This is a policy condition that insurers sometimes apply to claims if your property is underinsured. It means you may not receive your full claim payout if the true value of your home and contents does not match your policy.

For example, let’s say your home is worth £1,000,000 and you’ve insured it for half of that (£500,000). If you make a claim for £300,000, your insurer might only pay out £150,000, leaving you to cover the other 50% out of your own pocket.

The ‘average clause’ was designed to deter people from underinsuring by hitting them financially when they make a claim on their policy.

Your policy might be cancelled

If your home is underinsured by a substantial amount or it becomes apparent that you knew your home was underinsured and didn’t rectify it, your insurer may cancel your policy.

If this was to happen when you made a claim, you would need to pay out the full claim value yourself. Not to mention you would be left without a valid insurance policy.

How can you avoid underinsurance?

The good news is you can update your home insurance policy at any time. So if you think you’re underinsured you can rectify it before it’s too late. Our top tips for making sure you have the right level of cover are:

• Review your policy regularly: Make it a habit to check your policy every six months and at renewal.
• Get a professional rebuild cost valuation: You can use an online calculator or hire a chartered surveyor to carry out an assessment.
• Create a contents inventory: Using a spreadsheet or home inventory app, log the ‘new for old’ replacement cost of items throughout your home. We have a handy article to help you value your home contents.
• Declare any high-value items: You’ll have a ‘single item limit’ as part of your home insurance policy (typically between £1,000 and £5,000 for standard policies). You’ll need to declare any items that exceed this separately to make sure they’re covered. For antiques, art or jewellery, regular valuations can be useful.
• Inform your insurer of any changes: Anything that might affect the value of your home and contents should be relayed to your insurer. For example, home improvements, extensions or big purchases. 

The benefits of using a broker

A broker can advise you on the type of policy that’s best suited to your home, as well as recommending a level of cover that’s right for your needs. They’ll search the market on your behalf, presenting you with a range of policies to choose from.

They can help make sure you’re fully protected, which could save you money in the long run as buying an incorrect policy can be costly. When it comes to underinsurance, it’s one of the things a broker can help you avoid.

If you’re in the market for a new home insurance policy, an insurance broker from Wesleyan Financial Services can help.