Underinsurance Building & Home Contents Insurance
By your side. Helping you make informed decisions.
What does underinsurance mean?
Underinsurance arises when the coverage provided by your insurance policy falls short, leaving you accountable for a portion of expenses or losses. This shortfall can lead to significant financial strain.
Why getting the right level of insurance is critical?
Insurers base their premiums on the value of the insured items, known as the 'sum insured.' If this sum is lower than the actual value of your assets during a claim, the insurer may adjust payments accordingly, potentially leaving you with insufficient funds to cover losses.
It is important to highlight, if any underinsurance is found to be deliberate or reckless, an insurer may have the right to void a policy.
What causes underinsurance?
In recent years, underinsurance has become more prevalent due to various factors:
Escalating inflation rates
Rapid increases in the cost of goods and services render previously sufficient insurance policies inadequate.
Disruptions in the supply chain
Global shortages of essential materials and machinery can prolong business downtime after incidents, leading to substantial economic losses.
Inaccurate rebuild valuations
Changes like property expansions or installations of solar panels are often overlooked or inaccurately recorded, resulting in undervalued rebuild estimates.
Top tips to help you avoid underinsurance
These may help you get the basis of your insurance right and reduce the risk of underinsurance.
Use professional valuation services for accurate assessments of your sums insured.
Base building sums insured on rebuilding costs rather than market value, considering any unique features that may impact reconstruction expenses.
Be mindful of differences between accountancy and insurance definitions when determining business interruption coverage.
Opt for an indemnity period for business interruption insurance that allows sufficient time for full recovery, typically at least 6 months.
Due to recent modifications to buildings—such as the addition of solar panels or expansions—the accurate recording of these changes in insurance systems is often overlooked or inaccurately documented. This oversight leads to a substantial underestimation of the cost to rebuild, leaving policyholders exposed to the risks of being underinsured.
While indexing is a common method used to mitigate underinsurance by adjusting policy coverage for inflation, it is essential to recognize that indexing alone doesn't fully address the issue for several reasons. For instance, it neglects crucial factors like property alterations or initial inaccuracies in rebuild estimates, both of which can significantly impact the adequacy of coverage.
Rebuilding cost vs market value
Costs and value can be very different. A building may be worth £1m on the property market because of the land it stands on but might costs only £500,000 to rebuild.
Market value should not be used as a sum insured.