When taking out an insurance policy, it is easy to focus on finding a great price and assume you are fully protected. However, if you are not careful when valuing your property or belongings, you could find yourself dealing with underinsurance.

At One Call Insurance, we know that reading through policy documents and calculating valuations is not most people’s favourite weekend activity. To help make things clearer, we have put together this simple guide explaining what underinsurance is, how it happens, and how you can avoid it.

What Does Underinsurance Mean?

Underinsurance happens when the amount you are insured for (known as your ‘sum insured’) is less than the actual cost to rebuild your property or replace your contents from scratch.

If the worst happens and you need to make a claim, being underinsured means your policy will not stretch far enough to cover the full cost of the damage. Ultimately, this leaves you responsible for paying the shortfall out of your own pocket.

How Does Underinsurance Happen?

People rarely underinsure their property on purpose. It usually happens by accident due to a few very common misunderstandings:

• Confusing market value with rebuild cost: The market value is the price your house would sell for on the open market. The rebuild cost is the exact price of the materials and labour required to rebuild your home from the ground up if it were completely destroyed. These two numbers are almost never the same.
• Rising inflation and material costs: The cost of building materials and trade labour has risen significantly across the UK in recent years. A rebuild valuation that was perfectly accurate five years ago will likely fall quite short today.
• Home improvements: If you have added an extension, converted a loft, or upgraded your kitchen, the rebuild cost of your property has increased.
• Forgetting new purchases: It is very easy to buy new jewellery, electronics, or expensive furniture over the years and simply forget to update your contents policy to reflect these new items.
• Inheriting valuable items: During a bereavement, it can be easy to overlook high-value items such as jewellery, watches or artwork. Remember to update your contents policy and check whether any inherited items need to be listed separately.

The Condition of Average Explained

If you are underinsured, you might assume that your insurer will simply pay out up to your maximum coverage limit. Unfortunately, this is not how most policies work.

Most property policies contain a clause known as the ‘Condition of Average’. This rule allows your insurer to reduce your claim pay-out by the exact percentage that you are underinsured by.

To make this crystal clear, let us look at an example of how the math works in practice:

• The true rebuild cost: A surveyor calculates that it would cost exactly £400,000 to completely rebuild your home from the ground up.
• Your insured amount: When taking out the policy, you estimate the rebuild cost yourself and insure the property for £300,000.
• The underinsurance calculation: Because £300,000 is only 75% of the true £400,000 rebuild value, you are underinsured by 25%. You are effectively asking the insurer to carry 75% of the risk, while you carry the remaining 25%.
• The incident: A severe burst pipe causes a significant flood in your kitchen, resulting in £40,000 worth of damage.
• The pay-out: When you make a claim for the £40,000, the insurer applies the condition of average. Since you only insured 75% of the home’s total value, they will only cover 75% of your claim.
• The final result: The insurer pays out £30,000 (which is 75% of the £40,000 damage). You are left to cover the remaining £10,000 shortfall yourself.

In short, the percentage of the property you chose not to insure becomes the exact percentage of the claim you have to pay out of your own pocket.

How to Avoid Being Underinsured

The good news is that avoiding underinsurance is entirely in your hands. A few simple habits can keep your policy completely accurate:

• Review your cover annually: Do not just let your policy automatically renew without checking the details. Take five minutes each year to ensure your coverage limits still reflect your current situation.
• Use a rebuild calculator: The Building Cost Information Service (BCIS) offers a residential rebuilding cost calculator that can help you get a much more accurate estimate of your home’s true rebuild value.
• Value your contents carefully: Go room by room and make a note of what it would cost to buy all of your possessions brand new today. Do not forget everyday items like clothing, kitchenware, and items stored in the loft or garage.
• Tell your broker about major changes: If you are planning a renovation or have just bought an expensive item, let your insurance provider know so they can update your policy immediately.

Review Your Cover with One Call Insurance

Having the right level of cover gives you the peace of mind that you will be fully supported if things go wrong. If you are unsure whether your current policy limits reflect the true value of your home, it might be time for a quick review.

Feel free to get in touch with the team at One Call Insurance today. We are always here to help you check your details, discuss your options, and make sure your assets are properly protected.

Sources

• Financial Conduct Authority (FCA): Guidelines regarding Consumer Duty, clear policy communication, and fair claims outcomes.
• Building Cost Information Service (BCIS): Data on rising UK construction and reinstatement costs, alongside the ABI/BCIS House Rebuilding Cost Index.
• Association of British Insurers (ABI): Industry insights on average claim pay-outs and the frequency of underinsurance in the UK property market.