Up to four in five UK households are underinsured and risk receiving little or no payment if they have to make a claim.
Underinsurance occurs when a person’s insurance policy does not cover them for the full cost of replacing their home or belongings.
This usually happens by mistake, but it can lead to very real – and very significant – problems. Insurers reserve the right to reject claims when a person is underinsured or to pay only a fraction of the payment the insured needs.
Here’s how to determine if you’re underinsured and what to do to fix the problem.
Safe as houses? Underinsurance is a problem that primarily affects properties, and is less common for car, travel or life insurance – although it can happen
What is underinsurance?
Underinsurance occurs when a customer’s insurance policy does not fully cover them for the replacement value of their home or belongings.
This is normally a contents insurance issue, although it can also arise with buildings and travel insurance.
For example, if a consumer owns £10,000 of property, but only buys home insurance with £5,000 of contents cover, then they are 50% underinsured.
It’s a surprisingly big problem. About 80% of households are underinsured, or four out of five, according to insurance broker Macbeth.
Underinsurance normally occurs when insurance customers are asked how much coverage they need or how much their home would cost to rebuild, but they fool themselves into understating.
Why is underinsurance a problem?
Underinsured customers may have their claims denied or only partially reimbursed.
Take our home insurance example above. If the owner’s house has burned down and he has lost everything, his insurer can only pay out the £5,000 ‘sum insured’, leaving £5,000 out of pocket for the policyholder.
The Financial Ombudsman Service watchdog said it has come across several instances where claims have been rejected in this way.
Likewise, the insurer may cancel the claim entirely and retain all premiums the customer has paid up to that time.
Insurers take a dim view of underinsurance. This is because an underinsured person is likely to pay lower insurance premiums that do not properly reflect their risk to the insurer.
Not covered: In the worst case, being underinsured means losing money if you have to make a claim – or even see the entire claim rejected
It can be tempting to deliberately lie and underinsure yourself in order to cut your costs, assuming that some insurance payments are better than none.
Your insurer may pay up to the level you specified. But it’s a risky game to play, because if an insurer thinks you’ve misled them, they can deny the claim entirely.
From an insurer’s perspective, deliberately lying in the face of clear questioning just to get a cheaper premium can be a form of fraud.
Insurers must also ensure that the premiums they charge reflect the risk of all their policyholders, and underinsurance upsets this delicate balance.
Insurer NFU Mutual said many homeowners were at risk of being underinsured as the cost of rebuilding their homes had risen – even if the price of their home had not risen.
This is due to the rising cost of building materials and labor.
Andrew Chalk, home insurance specialist at NFU Mutual, said: “Although house prices are falling, inflation is driving up rebuilding costs, so now is not the time to cut rebuilding cover. “
Why is property underinsurance a particular risk?
It’s easier to be wrong when appraising your home and possessions than your car, life insurance, or vacation.
Home prices vary wildly, and these values can go up or down. Someone can live in the same house for decades, making it easy to lose track of the current value of their property.
Home improvements can also cause homes to be worth much more than they were worth at the time the insurance policy was purchased, leading to accidental underinsurance if the insurer is not put up to date.
Assessing the contents of the home is also tricky, and most consumers are forced to rely on guesswork. Since our personal possessions tend to accumulate slowly over time, it’s easy to underestimate the cost of replacing them.
But the cars are relatively easy to assess. Organizations such as Black Book constantly appraise vehicles, and consumers can get a pretty good idea of their car’s worth by checking recent sales numbers.
Also, cars don’t last as long as houses and don’t contain the same level of valuables as property, which simplifies their valuation.
That said, underinsurance is possible with car cover, for example if a car is modified to improve its value but the owner does not notify the insurer.
Underinsurance is also rare in life insurance, as consumers normally agree a payout value with their insurer before taking out these offers, leaving little room for quibble during the life of the insurance. police.
Travel insurance customers can find themselves underinsured, for example if they buy coverage for fewer days than necessary or if their policy excludes valuables.
How to check if you are underinsured
For contents insurance, first determine the value of your belongings. Do this before you purchase inventory insurance, and at regular intervals thereafter, or if you buy something particularly valuable.
Most home insurance policies replace lost items with new ones, so figure out how much it would cost you to replace everything at today’s prices.
The ABI says commonly overlooked items include rugs, furniture, upholstery, cutlery, collectibles and white goods.
Remember that items in your garden or shed may not be covered under the terms of your contents insurance policy, so check your policy wording before including them.
High value items may need to be appraised by a professional. These include musical instruments, bicycles, antiques and jewelry, but it depends on your insurer.
Also pay attention to “single item limits” in your coverage. This means that an insurer caps the amount they will pay for an item if you have to make a claim.
If you own something that is worth more than the one item limit on your insurance policy, let your insurer know and they will have to add it separately to give you peace of mind.
If you are already insured, check to see if there is a discrepancy between the value of what you own and what you are insured for.
If there is a discrepancy, contact your insurer to let them know. They may allow an immediate change to your policy or advise you to wait until renewal time.
For buildings insurance, you can either have an expert estimate the cost of rebuilding your home or use a free online tool. The ABI has such a tool here.
It is important to do this at regular intervals or if something has happened to significantly increase the value of your home.
A common mistake is to assume that your rebuilding cost is the price of your property or its mortgage value. But the true rebuilding cost could be higher than that and includes the cost of labor and materials.
Will insurers cancel my policy if I am underinsured due to an honest mistake?
Probably not. There is a law that defines how insurers deal with underinsurance, but it boils down to this: if you made a mistake in good faith, you should get fair treatment when you make a claim. You may not get the full value of your lost items back, but you should get something.
The law in question is the Consumer Insurance (Disclosure and Representations) Act 2012, known as Cidra.
This law states that if a consumer takes reasonable care not to be underinsured and the mistake was not reckless or deliberate, their insurer must act fairly.
This means that the company is unlikely to tear up a consumer’s policy just for underinsurance.
My insurer never asked me how much my belongings were worth – am I uninsured?
You may not be. Some insurance offers allow unlimited payment for assets in a home or cover you for the full cost of rebuilding. This removes all worries of underinsurance.
Is it better to be overinsured than underinsured?
Overinsurance is when a consumer has too much coverage – the opposite problem of underinsurance.
Generally, there’s no major problem with being overinsured, but it likely means consumers are paying higher premiums for coverage they can’t use.
Indeed, insurers will not pay more than the real value of your building or its contents.
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