A guide to avoiding underinsurance

A guide to avoiding underinsurance

It is often assumed that property owners have a rough estimate of the value of their building and contents. However, it was reported in June 2021 that 93% have incorrect insurance policies against their homes or buildings, with 14% being over insured, and a staggering 79% of property owners being underinsured.¹

The primary purpose of property insurance is to provide a financial safety net, should an event occur that results in significant monetary loss. When a property is underinsured, it means that the policy taken out by the owner is insufficient and cannot cover the full cost of the damage incurred.

Having the right level of cover is essential, as even if the amount you claim for is less than the total sum insured, you can still find yourself out of pocket.

The example below shows how following a £100,000 loss, the insurers will only pay £50,000, whilst the customer will still need to pay the remaining £50,000 to cover the loss. This is a real life example of the potentially adverse effects of being underinsured.

Example: (SGCMA- Insurance property values, 2022) ²

To help prevent situations like the above, Howden have created a guide where in just five steps, you can protect your home, building and the contents inside from being underinsured. 

1. Know the value of your building and contents

Having your property and contents valued is an essential action that could save you from catastrophic financial loss. In the current turbulent economic climate, many property owners have avoided arranging building valuations and risk assessments with the worry that it could lead to higher premiums.

However, taking the right steps to conclude the correct value of your property is critical if you find yourself needing to make a claim. It is important to remember that your mortgage valuation is not a bespoke insurance valuation and this will need be carried out separately by a qualified provider.

A valuation will consider a number of influences to determine a final figure. Some of these may be:

• Listed building status
• Modern methods of construction
• Location e.g. if the property close to a railway
• Extensive out buildings such as garages and storage sheds
• Alterations and extensions
• VAT status
• Size of property

2. Ensure you have the right type of cover

You may think you’re protected by simply having your property insured. However it is not always the case. It is key to ensure you have obtained the right type of cover in order to protect all of your assets associated to your home or building. Contents such as technology devices, jewellery, expensive clothing and antiques are all at risk should you find your home being victim to a flood or fire.

By securing a product that gives you maximum of not just the bricks and mortar but the cherished possessions inside, you’re taking the right action so if you need to claim, you won’t end up out of pocket. One of the ways you can do this is by using a specialist Insurance broker. A specialist broker will be qualified to navigate the trying conditions of the current market and source the best product to protect your property.

3. Secured the right level of cover?

Ensuring your policy provides the right level of cover is an essential. Routinely, insurance contracts almost always contain an “Average” condition. This mechanism exists to ensure that policyholders insure for the correct value and pay the correct premium.  It does this by penalising the policyholder so that they bare an equitable proportion of any underinsurance in the reinstatement value declared at policy inception (or renewal).³

Even if the “Average” condition is waived, it is still important to insure for the correct value, as any claim will ultimately be capped at the sum insured.  Where the “Average” condition is removed this will be conditional upon the policyholder performing periodic professional revaluations, usually once every 3 years. By using an experienced Insurance broker, they will be able to advise you on the level of insurance that needs to be taken out against the property.⁴

4. Understand your policy and it’s limits

Even if you think you’re already insured correctly. Checking the limits of your policy can save you a lot of hassle in the long run.

Every policy wording will be different and it's important for customers to understand these differences in order to be adequately covered. Inner policy limits are especially significant.

For example, many blanket policies specify a limit for valuables and each insurer may define 'valuables' differently. Therefore, it's important to read the relevant terms and understand how the policy defines them. Otherwise, certain items could exceed inner policy limits depending on the definition of 'valuables'. Customers can then make an informed decision on how to group and value different items to arrive at a suitable sum insured and to ensure a product meets their specific needs.

Every policy has unique wording, so it is essential for customers to gain a full understanding in the differences in their policy to ensure they are adequately covered. For example each insurer defines the term ‘valuables’ differently.  Therefore, it is essential to have a full understanding of the terms and conditions and how they are defined by the policy. Failure to do this could result in certain items exceeding the policy limits and therefore resulting in loss.

5. Finally, are you with the right Insurance broker?

There are many Insurance brokers in the market, however there a select few that can provide you with a bespoke and friendly service, with global reach. Howden are specialist Insurance brokers who are well immersed in the world of Construction, Property and Real Estate Insurance. Our dedicated teams are experts in their respective fields and have a breadth of experience in securing property owners with fully tailored and comprehensive products to protect their assets.