Underinsurance can be costly regardless of whether you are accidentally or deliberately underinsured; the results are the same. Insurance policies are often quickly applied for online without thorough investigation into the accurate value of the property.
If you are not 100% sure on what underinsurance is, you can find it explained here.
When you need to make an insurance claim, your property must be insured to the correct value. The maximum sum insured can only be obtained if:
1. the property is completely destroyed by fire and is a total loss
2. the cost to rebuild is in excess of the sum insured
Underinsurance can be damaging for you in two different ways:
Most policyholders do not realise they are underinsured until it becomes necessary to make a claim, at which point it's too late to amend the policy. The consequences of underinsurance can be serious and far reaching.
Your insurance provider may also decide to cancel your cover if you are underinsured. This has further implications for obtaining building and contents cover from an alternative provider: you will find you have a limited choice of providers willing to provide cover, and your premium cost will likely increase because of a prior cancelled policy. An insurance provider who discovers your cover was insufficient (i.e., you were underinsured) may also void and recall any previous pay-outs for claims made against that cover, adding to your financial difficulty.
Most Insurance Policies typically contain an underinsurance penalty clause which Insurance Professionals know as ‘average.'
The average clause states that if your property is underinsured, your insurer is only liable to pay for a percentage of the value of items lost. Leaving you the policyholder, to pay for the remaining cost; determined by the percentage your property is under insured. In this case, if your home contents cover is for £10,000, but the true value is £20,000; your cover is under insured by 50%. When the average clause is applied, your insurer will only cover the cost of 50% of your insured value, i.e., 50% of £10,000, only £5,000. Leaving you to pay the remaining cost of £15,000 to replace your lost or damaged property.
Underinsurance can often be more damaging than you would imagine. After being underinsured, it may take time to raise the funds necessary to get your property back to its pre-loss condition, and possibly leave you without the essential basics of living in the meantime. In such a situation you may have to source credit that puts you into debt for years to come.
Most UK households are unaware of the small print in their insurance policies. It is so important that you learn the secret clauses hidden in plain sight within your policy terms and conditions.
Underinsurance clauses do not only apply to building cover but can also apply to other parts of the policy such as loss of rent, stock and contents and Landlords Contents cover.
Buildings sum insured is the cost of rebuilding the property if it was completely destroyed. Commonly people insure their property at the retail market value which is what they would get if they sold their property. In the event of material damage to the property following a fire or a leak, the loss sustained is the cost of repairing the damage. This is what your sum insured should be based on, making sure you avoid underinsurance.
Your building sum insured must include all costs to fully demolish and rebuild the property in full, including all ancillary costs. This involves:
You must also include fees to comply with statutory and local authority requirements such as planning requirements and current building regulations. Remember that properties must be returned to current codes not as they were built originally.
We have all seen the increases in labour and materials over recent years so include inflation costs to allow for an increase in building repair costs during the period of construction. Professional Fees for architects, surveyors and engineers must also be allowed for.
To avoid underinsurance, each property owner would ideally have a Professional valuation undertaken by a Royal Institute of Chartered Surveyors (RICS) qualified Surveyor. We work with RICS Chartered Surveyors who are experienced in producing VAR (Value At Risk) surveys to give a realistic indication of the sum to be insured.
Oakleafe Loss Assessors cannot stress the importance of ensuring a correct sum insured is used when placing your insurance. This should be subject to regular review at renewal. Remember the responsibility is firmly on you as property owner to arrive at and insure for the correct reinstatement value.
For all your insurance claim needs visit Oakleafe Claims or give us a call.
If you have been declined while trying to claim on your domestic or commercial insurance, we can help. We can also help with professional services, for example, Brokers, VAR Valuations and Managing Agents.