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What Is Underinsurance? Underinsurance Explained

What Is Underinsurance? Underinsurance Explained
average clause, buildings insurance, contents insurance, Insurance Claim Management, Insurance Claims, insurance policy, Loss Assessor, underinsurance, underinsured

Underinsurance refers to the situation in which an individual or entity has an insurance policy, but the level of coverage is insufficient to cover the cost of a potential claim. This usually arises when the insured party has not accurately assessed the value of the assets being covered or the potential liabilities they might face.

What Is Underinsurance?

Underinsurance happens when your property is insured for less than its true value. It is a common occurrence since most policyholders do not have accurate knowledge about the total value of their property. Add to that the fact that many insurers do not ask specific questions regarding the total value of your property; your cover is likely to be insufficient, meaning underinsured.

According to Macbeth, 80% of UK properties are underinsured meaning that's 4 out of 5. If the worst was to happen and a property suffered severe damage, the amount paid out following an insurance claim would be significantly reduced. On average, in the UK, buildings are insured for only 68% of the amount they should be. Underinsurance may provide you with a slightly cheaper premium each year, but it doesn't cover you for the value you need, and you'll be responsible for the shortfall, not your insurer.

What causes underinsurance

Underinsurance is often caused when it is applied and searched for as a quick to-do. If rushed and not entered correctly, this can cause you to be underinsured. You think by filling in the supplied forms, or making a phone call answering the relevant questions, the value of your property is protected should you need to make a claim. However, the forms you supply and the questions you answer are typically pre-filled and the guidance based on averages.

As an example, the contents value of a domestic property is usually set at £10,000 based on the average. You may think this is enough, without giving the valuation any further thought. Your insurance provider may ask something like, 'Is the total sum of your contents worth less than £10,000?'. You may give it a quick thought without any thorough evaluation of the replacement cost should you need to make a claim.

The accuracy of your insurance cover is likely to be insufficient as a result. This causes underinsurance.

Underinsurance can be caused by several ways:

  • Incorrectly calculating the value of your home and contents.
  • Failing to include like the cost of removing debris in your calculations.
  • Increased repair costs caused by inflation.
  • Lessening your premiums without thorough care.

Whose responsibility is it to avoid underinsurance?

It is your responsibility to avoid underinsurance. Whether your insurance policy cover is inaccurate due to deliberate misinformation, or unintentional carelessness, your insurance provider will not act with any empathy if you need to make a claim. When applying for insurance cover, it is your responsibility to make sure you consider the replacement cost of all your property.

What happens when you are underinsured?

The consequences of underinsurance can be significant regardless of whether you are accidentally or deliberately underinsured; the results are the same. Underinsurance can be damaging for you in two different ways:

  • 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.

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.

What is the underinsurance 'average' clause in your policy?

Most Insurance Policies typically contain an underinsurance penalty clause which Insurance Professionals know as 'average.'

The average clause in insurance 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 in Insurance 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.

What does the underinsurance penalty apply to?

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.

What can you do to prevent underinsurance?

Avoiding underinsurance requires a thoughtful understanding of your own insurance needs and a proactive approach in regularly reviewing and updating your coverage. To begin with, it's vital to fully comprehend what your insurance policy covers and what it doesn't. This will allow you to identify any potential gaps in your coverage.

It's also essential to accurately assess the value of your assets. Underestimating their worth can lead to underinsurance. Regularly reviewing your insurance policy and updating it as your life circumstances change is another crucial step to avoid underinsurance.

Here are some bullet point suggestions to help you avoid underinsurance:

Understand your policy:

Make sure you fully comprehend the ins and outs of your insurance policy, including what is covered and what isn't.


Accurate valuation:

Ensure you have an accurate and up-to-date valuation of the assets you insure.
Regular reviews: Review your policy regularly, at least once a year, and anytime a major life event occurs that could affect your coverage (such as a home renovation, the purchase of a new vehicle, etc.)


Update your policy:

Don't hesitate to update your insurance policy as needed. If you acquire new assets, make significant upgrades to your home or car, or experience any other significant changes, ensure your insurance policy reflects these changes.

Look into policy add-ons:

Depending on your situation, you may need additional coverage that's not included in a standard policy. For instance, you might need to add flood insurance if you live in a flood-prone area.


Seek professional advice:

Consider consulting with an insurance professional who can provide advice tailored to your specific needs and circumstances.

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.

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If you have been declined whilst 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.

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