Underinsurance: A Comprehensive Guide
Underinsurance arises when your residential or commercial property is insured for less than its actual worth. This issue is widespread because many policyholders lack precise knowledge of the value of their property. Many policyholders just look at the market value, when in fact this isn’t the full picture. Additionally, insurers may not probe deeply into the full value of the property, leading to underinsurance.
Underinsurance can stem from various factors:
- A miscalculation of the property and contents within the property.
- Underestimating what the property would cost to repair, given the current costs in relation to inflation.
- Trying to get a reduced premium, generally at the cost of not including key pieces of information.
A common reason for Underinsurance
Underinsurance often occurs when property owners rush through the insurance application process without taking the time to assess the true value of their assets. Many people assume that simply completing a form or answering a few questions over the phone will provide adequate cover, but this approach can lead to significant gaps in protection. These forms typically rely on broad averages and may not take into account the unique features, contents, or rebuild costs of your property.
If you underestimate the value of your building, outbuildings, fixtures, or contents—even unintentionally—you could find yourself with insufficient cover when it matters most. It’s also common for property owners to forget to update their insurance after renovations, extensions, or changes in use, which can increase the rebuild cost or the value of contents. Taking the time to gather accurate information and, if needed, seeking professional advice can help ensure your policy reflects your property’s true worth.
Preventing Underinsurance
It is ultimately down to you to prevent underinsurance from happening. At the end of the day, insurers will not sympathise with you if you were inaccurate when arranging your cover. Be meticulous when applying for building insurance, ensuring that the entire replacement of your property is accounted for.
One of the main reasons we see for underinsurance is an incorrect rebuild value given at the time the policy was purchased. Sometimes confused with market value, the rebuild value of your property should include the full build from the foundations up. This also includes the demolition and removal of the old building, all labour costs, materials and even electrics and plumbing.
Although there are tools online that help predict your rebuild value; to gain an accurate valuation you need to employ the services of a Chartered Surveyor. You can find a Chartered Surveyor by visiting the Royal Institute of Chartered Surveyors website.
In recent years, there have been many issues with rebuild values as the cost of labour and materials has risen significantly across the UK. What may have cost £10,000 just 3 years ago could now cost nearly £15,000. And with the Building Costs Information Services (BICS) predicting further rises over the next 5 years, it is important to have your policy reviewed annually to ensure the rebuild value is sufficient for your property.
Find out the difference between marketing value and rebuild value here
The ‘Average’ Clause
Insurers might apply the ‘average clause’ if you are underinsured.
Most insurance policies include an ‘average’ clause as a penalty for underinsurance. This clause means that if you’re underinsured, your insurer only pays a portion of the item’s value, corresponding to the underinsurance percentage.
For Example: Imagine the total rebuild cost of your property is £200,000. However, your insurance policy only has a rebuild value of £100,000 – 50% of the actual cost. This means you are 50% underinsured.
If your claim has a total settlement of £20,000, as you are underinsured by 50% insurers will only pay out 50% of the settlement value – less your excess. In this case, you will get £10,000 (less the excess) from the insurer for the £20,000 worth of damage. This means the other £10,000 will have to be funded by you!
It is ultimately down to you to prevent underinsurance from happening. At the end of the day, insurers will not sympathise with you if you were inaccurate when arranging your cover. Be meticulous when applying for buildings insurance, ensuring that the entire replacement of your property is accounted for.
Fully understand your policy
Accurately value your property to ensure that no factor is underestimated, leading to underinsurance.
Regularly review your policy, especially after significant events like renovations, extensions, and conversions.
Consider policy add-ons for additional coverage. If the area your property resides in is prone to floods, you will probably need extra cover to account for this.
Case study: Total loss fire claim
The below case study is not an example in being underinsured as such. Rather, an example of a devastating situation in which the policyholder received a full settlement, thanks to being adequately insured for the full total rebuild cost of their property.
Expert claims management from George Masterton
Our Peterborough representative went above and beyond to help this family in desperate need after suffering a total loss after a wild fire spread to their property. As the policyholder goes on to say in the video, insurance claims of this nature can be very complicated to deal with and it’s good to have someone guiding you through the process. Thankfully, George was on hand to bring the claim to a satisfactory conclusion for the family.
