Having a good insurance policy in place over your property, business or assets is a great way to ensure that they remain protected in the worst-case scenario. The trick is making sure that you not only have the right type of cover for your assets but that you have the right level of cover too.
Underinsurance can be devastating for those that aren’t aware that they’re underinsured, whether you’re a homeowner or a landlord, leading to reduced or even refused payouts in some cases. With approximately 90% of all UK homes predicted to be underinsured in some way, we’ve dug a little deeper into what underinsurance is, why you could be underinsured and how to avoid it in the future.
What Is Underinsurance?
Underinsurance is a term used to describe a situation in which your property or assets are insured for less than it would actually cost to rebuild or reinstate it from scratch. In other words, being underinsured means that your policy wouldn’t provide enough cover if you had to build your home again from the ground up, including replacing the contents (if your policy covers building & contents). Being underinsured means that you aren’t adequately protected in the way that you might expect, often having to cover any shortfalls yourself if you do need to make a claim at any time.
How Can It Happen?
Calculating the true amount you need to be insured for can be difficult, particularly if you have a limited understanding of the cost of everything from building materials to up-to-date prices for items you’ve owned for years. Going around your home and valuing every brick, door frame and floorboard isn’t exactly feasible for most people, which is why property valuations are important. Without a professional valuation, it can be difficult to produce an accurate value for your property and contents. Some common pitfalls that tend to lead to underinsurance include:
- Out-Of-Date valuations – If you’ve had your property valued in the past and are still using that valuation for your insurance policies today, there is a high chance that you are underinsured. The cost and value of not just the home as a whole, but of building materials and the contents of the property can change drastically from year to year and with recent inflation trends, this could mean that your property is hugely undervalued and therefore, underinsured.
- Change of use – If your property changes use over the years, whether that’s added bedrooms or extensions, running a business from home or turning a business property from an office into a functional shop or kitchen, for example, this can affect the value of the property and the level of cover that you will need.
- Listed Buildings – Listed and protected buildings are typically far more expensive to repair than standard homes, not least due to the specialised materials and methods that some of these properties may need to be rebuilt or repaired with.
- Market Value vs. Reinstatement Costs – The market value of your property is likely to be very different from the reinstatement costs and one of the biggest mistakes people can make is insuring the property for its market value. You should always consider not just the materials for rebuilding, but the work required, as well as professional fees that could be required (e.g. planning, legal).
Why Is It Happening More Often Now?
Recently, more and more homes are being considered underinsured and a lot of it comes down to the rapidly changing financial world we live in today. From the pressures and effects of the COVID-19 pandemic to the price hike in building material costs and general rapid inflation, the cost of reinstating a property is much higher today than many people might expect.
- COVID 19 – The pandemic put a lot of pressure on everyone, from tenants and homeowners, to landlords and of course, on businesses. We’ve had to change the way we live and come to terms with various shortages that are still fighting to recover today, including high demand for workforces that can’t keep up, the changes to our homes including new home offices or businesses run from our dining room tables. These can all affect the value of your home or the kind of cover that you’re going to need. High worker demand means they can often demand higher prices, working from home means you may need a business insurance policy on top of your standard home insurance and you could even have to include the costs of your business property if you work remotely.
- Building Material Costs – The cost of building materials has been gradually rising over the past decade or so, but in recent years, the numbers have skyrocketed. This has a lot to do with material shortages and increased demand as a result. For this reason, a home that could’ve been rebuilt for £350,000 for example, could now cost anything up or above £440,000. This would mean that your property could be underinsured by at least £100,000.
- Rapid Inflation – General inflation has caused businesses country-wide to increase their prices to try and keep up and the building industry is no exception. With building material costs on the rise, businesses are having to charge more for the work involved to cover this in many cases. This could also play into the value of reinstating your property and therefore mean you are considerably underinsured.
What Are The Consequences?
If you are underinsured and need to make a claim at any time, this could have shocking consequences on the amount you can claim, or if you can even claim at all. When you’re underinsured, the insurance company has the right to apply ‘Averaging’. This states that the policyholder must bear a proportion of any loss or percentage of underinsurance if a claim is made. In other words, if you were to claim for your property at £400,000, but the property was only insured for £200,000, the insurance company would apply averaging and remove the percentage that you are uninsured from the total payout. So, using the example above where you would be 50% underinsured, if you claimed for £2,000, you would only receive £1,000.
Some policies will apply a ‘Special Condition of Average’, however, which may give you a little bit of wiggle room. The value of a property can change considerably during any one policy’s length, and this clause would mean that Averaging would only be implemented if the underinsurance was above a certain threshold. Depending on the level at which you are underinsured, some insurance companies may also refuse to pay out a claim entirely.
What You Can Do To Avoid It
There are a number of things you can do to avoid underinsurance. The most obvious, of course, is to make sure that you have your home valued regularly, but this isn’t always a simple or cost-effective process. Some things you could consider to help avoid underinsurance include:
- Index Linking – Index linking within your insurance policy could protect you from market and price shifts to a certain extent. It is applied by insurers to ensure that any assets and their insured values adjust automatically in line with the changing cost of living, inflation and deflation throughout the policy’s duration. This can help those who began the policy with an accurate valuation, but it is still the responsibility of the policyholder to ensure that any major changes in valuation are updated within their insurance policies.
- Professional Valuations – Professional valuations are a must for those who are lost when it comes to accurately valuing their property. A professional valuation will take everything into account from the property condition to the contents, the location, rebuild costs and more. You can use this value to begin an insurance policy, and maintain semi-regular valuations to keep on top of any major changes around your home or your area.
- Review Your Needs At Renewal – Each time your policy comes up for renewal, it’s important to review your existing policy and if any of your needs have changed. Have you redecorated or changed part of the home? Is there anything new within the property that could affect the overall value? You should always update your policy to reflect these changes to make sure you’re never underinsured.
If you need help with getting the right landlord insurance or business insurance policy for you and your assets, we are on hand to help. From understanding valuations and underinsurance, to how index linking can help you, simply get in touch with Ashburnham Insurance on FREEPHONE 0800 1696137.