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Underinsurance: All You Need To Know

Information on Underinsurance

Underinsurance is when the amount you are insured for isn’t enough to cover the cost of repairing, rebuilding or replacing the items covered.

Anything insurable can be affected by underinsurance.  It can occur when the cost of labour, parts and building materials increase and the rebuild value of your home is higher than when you first insured the property.

It’s also important to consider the contents of your home especially if you have purchased new furniture, technology, jewellery, or expensive items.  Generally, we would advise that you review the value of your contents every year and ensure that your sums insured is enough to replace everything you own.


What is the consequence of underinsurance?

If you are underinsured, you will be unable to claim for your full loss. Your insurer will apply the average clause meaning you will be able to claim even less.

The average clause applies when the sum insured is less than the actual value of goods or the property. The amount of the claim is reduced in accordance with the percentage difference in the insured vs actual value.

Claim Amount = (Actual Loss x Insured Amount) / Value of goods at time of loss
For example:

A Property is insured for £100,000 but would cost £200,000 to rebuild – you are underinsured by 50%.

 If an Escape of water claim cost £10,000 to repair but due underinsurance, only 50% of this will be paid. That would mean only £5,000 would be paid out on the claim – you will be required to fund the balance of the repair claim. Until the damage is repaired you will be unable to obtain insurance elsewhere.

If the property is severely undervalued, the insurer can refute the claim altogether.


Index Linking.

Index linking is used by property insurers as a way of ensuring the sums insured on the policy are kept in line with the current day market. Index linking is in line with inflation however it relies on the original figure being accurate.

Fixed sum cover is not index linked, some insurers however may index link specified items, others recommend valuables are evaluated every 3-5 years.


How To Avoid Underinsurance.


To avoid underinsurance in Buildings the best option is to avail of the services of a surveyor.  However, given there is normally a cost affixed to this service, you could use the BCIS (Building Cost Information Service) website and calculator to provide some guidance.


Contents are all your worldly goods, so you need to consider everything in your home should you need to replace everything you own. Items from cutlery to bedding, clothing to light bulbs, handbags to the kitchen table. Go through each room in the house and tally up the value to get your total.

To speak to one of our team about your sums insured or for further advice please call us on 02891 042042.

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