You have almost certainly noticed how expensive everything is today – from food in the supermarket to clothes and goods in retail stores. Whilst price rises affect us all as consumers, it’s not just on the high street and in our pocketbooks that the cost of living crisis has a significant impact. It also has major implications for your insurance policy – and not just in terms of increased premiums!
With inflation rising, underinsurance remains a silent threat that many homeowners and businesses overlook until they face a significant loss. This critical issue has highlighted the importance of maintaining adequate coverage to safeguard your personal and business assets, particularly property.
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 covered assets or the potential liabilities they might face.
For example, underinsurance occurs when your property is insured for less than its true value, leaving you vulnerable in the event of a claim. This is a common occurrence since most policyholders do not accurately know the total value of their property. In addition, many insurers do not ask specific questions regarding the total value of your property, so your coverage is likely to be underinsured. We will explore how to identify, address, and prevent underinsurance, ensuring you are well-equipped to handle the complexities of this very modern risk and protect yourself, your family and your business from potential financial turmoil.
Fast Facts:
Underinsurance can affect various aspects of a business, including property, stock, machinery, and even business interruption policies. It often arises from a lack of understanding or misjudgment of the actual value of business assets or the potential costs of a business interruption. Add to that the fact that many insurers do not ask specific questions regarding the total value of your property and other assets; your cover is likely to be insufficient, meaning underinsured.
Underinsurance may provide you with a slightly cheaper premium each year, but it doesn’t cover you for the value you need, and you, not your insurer, will be responsible for the shortfall. Recognising the common areas where underinsurance might occur is the first step towards rectifying this issue.
What Oakleafe Clients Say:
Business Underinsurance
Several factors contribute to underinsurance in businesses. These include:
Another common cause of underinsurance is a lack of due diligence when researching and buying policies. It is vital to complete insurance application forms accurately and not rush through them.
Identifying these causes can help businesses take proactive steps to ensure their comprehensive and up-to-date insurance coverage.
It’s important to note that many of the same issues persist for property owners.
Domestic Underinsurance
You think by filling in the supplied forms or making a phone call to provide the relevant information, 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 is based on averages.
The level of your insurance coverage is likely to be insufficient as a result. This can cause underinsurance in several ways:
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 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.
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 can claim even less.
The “Average” clause is a critical aspect of many insurance policies that businesses and homeowners must understand. This clause can reduce the payout on a claim if the insured value is less than the asset’s actual value, impacting the business’s ability to recover from a loss or a homeowner’s ability to secure a settlement to cover all the required repairs. Awareness and understanding of policy terms are crucial to manage this risk effectively.
Most insurance policies typically contain an underinsurance penalty clause, which insurance professionals know as ‘average.’
The average insurance 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 underinsured.
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 insurance 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 £15,000 to replace your lost or damaged property.
Your insurance provider may also cancel your coverage if you are underinsured. This has further implications for obtaining building and contents cover from an alternative provider: you will find 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 payouts for claims made against that cover, adding to your financial difficulty.
Most UK households are unaware of the small print in their insurance policies. You must learn the secret clauses hidden in plain sight within your policy terms and conditions.
Underinsurance clauses apply not only to building cover but also to other parts of the policy, such as loss of rent, stock and contents, and Landlords’ Contents cover.
Business
To avoid the pitfalls of underinsurance, businesses should engage in regular reviews of their insurance policies, conduct thorough risk assessments, and update their coverage accordingly. Strategies like engaging professional valuers for accurate asset valuation and keeping abreast of changes in market dynamics can safeguard businesses against underinsurance.
Domestic
Avoiding underinsurance requires a thorough understanding of your insurance needs and a proactive approach to regularly reviewing and updating your coverage.
To begin with, it’s vital to fully understand what your insurance policy covers and what it does not. 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. Another crucial step to avoid underinsurance is regularly reviewing and updating your insurance policy as your life circumstances change.
Understand your policy:
Be sure you fully understand the details 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 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 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 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 that the responsibility is firmly on you as a property owner to arrive at and ensure the correct reinstatement value.
If a business is underinsured, the initial step is to consult with insurance professionals to recalibrate the coverage. This process might involve re-evaluating all business assets and potential risks and then updating the insurance policies to reflect these changes accurately.
With the increasing reliance on digital technologies, cyber liability presents a modern area of risk that could lead to underinsurance if not properly accounted for. Businesses must recognise and protect against these emerging risks by adjusting their insurance strategies to cover potential cyber threats and ensure comprehensive coverage for cyber insurance claims.
Managing underinsurance is a proactive process that requires regular attention and adjustment to insurance policies.
Comprehensive reviews and risk management play pivotal roles in safeguarding businesses against the severe consequences of underinsurance. By following the strategies outlined in this guide, business professionals can ensure their enterprises are well-equipped to withstand the risks presented in today’s business environment, ultimately contributing to long-term sustainability and success.
Preventing underinsurance is an integral part of strategic risk management for any business. Regular insurance reviews and a clear understanding of emerging risks and how they could impact your operation are indispensable. This step protects your enterprise’s financial health and ensures its growth and sustainability in an unpredictable world.
Similarly, homeowners should regularly review their policy terms and the valuations attached to them. With inflation a major concern in the current economic climate, the cost of replacing contents or property is continuously rising.
Oakleafe Claims have represented policyholders and managed their insurance claims since before the First World War. We have vast expertise and experience in both domestic and commercial insurance claims, including riot claims, with thousands of satisfied policyholders who have received their deserved insurance settlement. With no upfront fees required, our internal data shows that insurance claims managed by professional loss assessors like Oakleafe can expect a settlement up to 40% higher than claims managed by the policyholder.
Contact Oakleafe Claims today for your complimentary, no-obligation consultation with our insurance claim professionals:
What Oakleafe Clients Say:
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 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.
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:
Your insurance provider may also cancel your coverage if you are underinsured. This has further implications for obtaining building and contents cover from an alternative provider:
An insurance provider who discovers your cover was insufficient (i.e., you were underinsured) may also void and recall any previous payouts 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 insurance 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 underinsured.
In this case, if your home contents cover is for £10,000, but the true value is £20,000, your cover is underinsured by 50%.
When the average insurance 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. You must pay the remaining £15,000 to replace lost or damaged property.
Most UK households are unaware of the small print in their insurance policies. You must learn the secret clauses hidden in plain sight within your policy terms and conditions.
Underinsurance clauses apply to building cover and other parts of the policy, such as loss of rent, stock and contents, and Landlords’ Contents cover.
Avoiding underinsurance requires a thoughtful understanding of your insurance needs and a proactive approach to regularly reviewing and updating your coverage. To begin with, it’s vital to comprehend what your insurance policy covers and doesn’t fully. 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. Another crucial step to avoid underinsurance is regularly reviewing and updating your insurance policy as your life circumstances change.
Consider consulting with an insurance professional who can provide advice tailored to your 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. At Oakleafe, we work with RICS chartered surveyors experienced in producing VAR (Value At Risk) surveys to give a realistic indication of the sum to be insured.
Oakleafe’s loss assessors cannot stress the importance of ensuring the correct sum insured is used when placing your insurance. This should be subject to regular review at renewal. Remember that the responsibility is firmly on you as a property owner or business owner to arrive at and ensure the correct reinstatement value.
What Oakleafe Clients Say:
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