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Understanding Underinsurance: Protect Your Property and Finances

Houses lined up with one highlighted

Many property owners don't think about underinsurance until it's too late. What exactly does it mean to be underinsured? It is often misunderstood, putting people and businesses unknowingly at financial risk. Complex building insurance policies and terms like the 'average clause' can make it difficult to know whether you are fully protected.

From our latest data, we estimate that 81% of buildings in the UK are underinsured and 14% overinsured. This leaves just 5% of buildings with accurate insurance. And, on average, the underinsured are covered for just 63% of what they should be.

Knowing what underinsurance means and understanding the risks are important steps in protecting your property and peace of mind. This guide will look at these risks and give practical tips on how to protect your building and finances.

What is underinsurance?

You are underinsured when your insurance policy doesn't cover the full cost of a loss. This can happen if you underestimate the cost to rebuild your property or to replace your items. If you do not update your policy regularly due to rising costs, you may become underinsured.

Let’s use Leila Hassan as an example. When she first bought her house, Leila got home insurance. Over the years, she has renovated her kitchen and added an extension, increasing the property's value. If Leila has not updated her policy to cover these improvements, she could be underinsured. If a fire or major damage occurred, her policy might not cover the cost of rebuilding her upgraded home, leaving her to pay the difference.

Leila’s contents can also be underinsured. A valuable item may not be fully covered if it is not accurately valued or listed in a policy. For full protection, Leila will need to regularly review the true rebuild cost of her property as well as the value of her contents.

Note: There is a difference between underinsured and uninsured. Uninsured is simply the lack of insurance against a home, item, etc. It is when there is no existing policy to cover the asset in the event of a loss.

What happens if you’re underinsured?

A flooded street in North Yorkshire

Being underinsured can have serious consequences. If a fire, flood, or other emergency affects your property and you need to make a claim, the gap between your coverage and the actual loss can cost you a lot of money.

Let's go back to Leila. If her newly renovated home, which would now cost £500,000 to rebuild, is only insured for £400,000, she would be responsible for the remaining £100,000 in the event of total loss. This shortfall could strain her finances, potentially leading to debt or the use of savings meant for other purposes.

This is where some insurers apply the 'average clause', which reduces the payout based on underinsurance. If Leila’s home is insured for 80% of its value, the insurer might only pay 80% of any claim, leaving her to cover the rest.

Consider this real-life example: A flood in a Hampshire village damaged a family-owned pub. The property was insured for £200,000, but the true cost to rebuild was £400,000. The repair costs were £40,000, but the insurer only paid £20,000 because of the 50% underinsurance. The landlord had to pay the remaining £20,000, leading to financial problems and a long dispute with the insurance company over the claim limit.

In another example, a family whose home was destroyed by fire found their policy didn't include recent home improvements. As a result, they got much less money than needed to rebuild their improved home. This caused financial problems and delayed their return to normal life as they struggled to pay the extra costs.

These examples show why having the right amount of insurance is important. Property owners should review and update their policies every year to check their levels of cover. The right protection will help you recover from disaster quickly and without worrying about extra costs.

How to calculate the right amount of insurance

So, how might you go about ensuring that you have the right amount of insurance for your property? There are a few key steps to run through to obtain a policy that reflects the true value of your property and possessions:

1. The first step is to find out the rebuild cost for the sum insured. This is the total cost to completely rebuild your property from scratch, including materials, labour, and other fees. Unlike the market value, the rebuild cost focuses on the actual expense of reconstruction. One of the quickest and most cost-effective ways to do this is to get a desktop assessment from Find out more here. 

2. Then, make a list of your belongings. Write down how much each item is worth, especially valuable things like electronics, jewellery, and furniture. Homeowners can use home inventory apps to keep an organised and updated record. This helps make sure your building and contents insurance will cover everything if you have a loss.

When you’re looking for insurance for the first time, this should cover the steps you need to take. However, it is recommended that building insurance policies be reviewed and renewed every year. When it comes to renewal, it’s best to take the following additional steps:

3. Keep track of any improvements or modifications. When any changes to the building are made, the policy needs to be updated. New extensions, kitchens, or bathrooms can increase the rebuild cost. Telling your insurer about these changes ensures your coverage stays adequate.

4. Don’t forget about inflation! Over time, inflation can raise the cost of building materials and labour. Make sure your policy has index linking or review and adjust your coverage limits each year to account for these increases.

By following these steps, you can better understand your insurance needs. This knowledge helps you choose the right insurance for your needs. Good coverage ensures financial stability and peace of mind, knowing you are ready for the unexpected.

How to find out if you’re underinsured

Not due to renew your insurance any time soon? You can still check whether you are underinsured. Here are some signs that you may be underinsured:

Signs You May Be Underinsured

  1. Outdated Policy: If your policy hasn’t been reviewed or updated in several years, it may not reflect the building or content's current value.

  2. Modifications & Improvements: Any changes to the building can affect the policy. You could be left underinsured if your insurance policy is not updated to reflect these changes.

  3. Inflation: Rising property values and construction costs may mean you are not fully protected.

  4. High-Value Items: If you buy expensive items like jewellery, electronics, or furniture and do not add them to your policy, you could be left underinsured.

  5. Underestimated Rebuild Costs: If the initial estimation of a rebuild cost was too low, your coverage might not be enough to cover a complete rebuild. This can happen if you use a free online calculator to calculate your rebuild costs. The most reliable way to calculate the rebuild cost of your property is by a rebuild cost assessment.

If you think you might be underinsured, it’s best to review your policy, even if renewal is not due soon. Just follow the steps laid out in the section above to ensure you choose the right policy for your needs and get adequate coverage.

Protecting Your Property and Financial Future

A padlock on top of blank credit cards

You should now have a better understanding of underinsurance and how it can be avoided. As we explored, underinsurance can cause unexpected costs and complications during claims. To avoid this, it's a good idea to check the rebuild cost of your property and update your policy every year.

If you recognise signs of underinsurance and review your coverage, you are more likely to avoid being underinsured. Taking this proactive approach can give you peace of mind, knowing that you are protected.

Take the first step today and find out the rebuild cost of your property. Once you receive your reliable report, you will be able to make any necessary adjustments to your policy and protect your property and financial future.

Important disclaimer: The information provided here is for general informational purposes only and is not intended as professional advice. While we strive to ensure all information is accurate and up-to-date, the content may not reflect the most current legal or regulatory developments, standards, or practices. No representations or warranties are made (express or implied) about the accuracy of the information provided, and reliance on this information is strictly at your own risk.

We do not offer financial advice and nothing within this content should be construed as such. We recommend consulting with a qualified professional who can provide tailored advice based on your individual circumstances before making any decisions related to insurance.

Please note that we are not regulated by the Financial Conduct Authority (FCA) and as such, are not qualified to provide specific financial or insurance advice. Please see our footer for further information about us, including our website terms of use, privacy policy and more.


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