Up to four in five homeowners could be underinsured because they underestimate how much their home contents are worth, according to trade body the Association of British Insurers (ABI).
If you’re underinsured, the payout you receive in the event of a claim may not be enough to replace your possessions after a burglary, or if your property is damaged by fire or flooding. This could mean that you have to dip into savings to meet the cost of replacing your possessions yourself. In the worst case scenario, your claim may be refused altogether if your insurer believes that you deliberately bought less cover than necessary to reduce the cost of your policy.
Underinsurance is usually an issue when it comes to home contents insurance, as many homeowners don’t know how much their possessions are worth. But not having enough buildings cover is also a risk, particularly if you’ve made substantial home improvements since you bought your home.
Here, we look at what it means to be underinsured, and what you can do about it.
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What does being underinsured mean?
If your home insurance policy doesn’t fully cover the amount it would cost to replace your home’s contents, you’re underinsured. For example, let’s say you have £20,000 of contents cover, but you have £40,000 worth of possessions. In this scenario, you’ll be 50% underinsured.
This could happen because you’ve underestimated how much your possessions are worth, or maybe haven’t factored in your entire house contents, including things like curtains and bedding. Over time, the amount of things we own tends to accumulate too, increasing the chances that you might end up underinsured.
You may also find you are underinsured when it comes to your buildings insurance too. Buildings insurance covers the cost of rebuilding your home if it’s seriously damaged or even destroyed. It generally covers the cost of rebuilding your home from scratch, including the walls, windows and roof, so it is not the same as the value of your home. Building costs have rocketed in the past year, so it’s important to double check with your insurer that you still have enough cover. Making home improvements can also add to the cost of rebuilding your home, which can result in you being underinsured if you don’t update your home insurance policy. Read more in our guide Your essential guide to home insurance.
It’s less likely that you’ll be underinsured with other forms of insurance cover. For example, you’ll typically change your car more often than your home, and its value tends to depreciate over time. This makes it far less likely that you’ll find yourself underinsured.
What happens if my home contents are underinsured?
The risk of underinsurance is that your claim will only partially be paid out, or even rejected if your belongings are damaged or stolen. For example, if you have £20,000 worth of contents, but you’re only insured for £10,000, you could be left with £10,000 to find from your savings, or you might have to take out a loan to cover the cost of replacing your things.
In cases of underinsurance, insurers may apply what’s known as an ‘average clause’. What this means is that they can choose to reduce any settlement by the same percentage the homeowner is underinsured. Based on the example above, as the homeowner is underinsured by 50%, the insurer may only agree to pay out 50% of the claim, which in this case would mean the maximum the homeowner would receive is £5,000, even though they were insured for £10,000.
However, if you’ve made an honest mistake, and genuinely believed you had the right amount of cover in place, you’ll hopefully receive a payout. The law states that as long as you’ve taken reasonable care to avoid being underinsured, and the mistake wasn’t deliberate or reckless, your insurer must act fairly.
If you don’t think your insurer is acting fairly, then you can find out how to complain effectively in our guide How to complain about a financial company.
How can I make sure I’m not underinsured?
Consider how much your home contents are worth before buying cover. Start by roughly working out how much the items in each room are worth. Include things like clothing and bedding, as these can be expensive to replace. It’s also common for homeowners to forget to include things such as furniture, carpets, and white goods into how much contents cover is required. Factor in things you keep in any garden outbuildings too, such as bicycles and garden tools, which can be worth a considerable sum.
If you buy something valuable in future, make sure to update your policy. It’s ultimately about making sure that you would receive enough money to replace everything in its current condition.
If you have items such as antiques and valuable jewellery, these may need to be professionally valued before you take out cover. Also remember to include items such as sports equipment and musical instruments. If in doubt, increase the amount of cover you take out.
Look for the ‘single item limit’ in your cover, which is typically up to around £1,500. This is the maximum amount you can receive for a single item. Check that there isn’t a significant gap between how much your most valuable items are worth, and how much the single item limit is. If any item you have is much higher than this limit, get in touch with your insurer to discuss your options as they may allow you to amend your policy, or increase your cover at renewal.
Turning to buildings insurance, you can use the Association of British Insurers’ free online tool here to check your home’s rebuild cost, or you could ask a chartered surveyor to provide an estimate.
What happens if I’m overinsured?
It’s also possible that you may have too much cover, and in this scenario, you’ll be paying over the odds for cover you cannot use. Insurers won’t pay out more than the actual value of your contents and/or the cost to rebuild or repair your home.
Ultimately, it’s worth spending a little time when you’re taking out or renewing your home insurance working out if you’ve taken out the right amount of cover for your needs.
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