How to tell if your home is underinsured

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Up to four in five UK households are underinsured and risk getting little or no benefit if they have to make a claim.

Underinsurance is when someone’s insurance policy doesn’t cover them for the total cost of replacing their home or belongings.

It usually happens by accident, but it can lead to problems that are very real – and very big. Insurers reserve the right to deny claims when someone is underinsured, or pay only a fraction of the payout the policyholder needs.

This way you can find out if you are underinsured and what you need to do to solve the problem.

Safe as houses? Underinsurance is a problem that mainly concerns property and is less common with car, travel or life insurance – although it can happen

What is Underinsurance?

Underinsurance is when a customer’s insurance policy does not fully cover them for the replacement value of their home or property.

It is normally a home contents insurance problem, although it can also crop up with home and travel insurance.

For example, if a consumer has £10,000 worth of property, but only buys a home contents insurance policy with £5,000 worth of property cover, they are 50 percent underinsured.

It’s a surprisingly big problem. About 80 percent of households are underinsured, or four in 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 get it wrong by undervaluing.

Why is underinsurance a problem?

Underinsured customers may have their claims rejected or only partially paid.

Take our example of home insurance above. If the homeowner’s house burns down and they lose everything, their insurer is only allowed to pay out the ‘amount insured’ of £5,000, leaving the policyholder with £5,000.

The watchdog of the Financial Ombudsman Service said it has come across several cases where claims have been rejected in this way.

Likewise, the insurer may cancel the claim entirely and keep all premiums paid by the customer up to that point.

Insurers pay little attention to 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 file a claim – or even having the whole claim rejected

It can be tempting to deliberately lie and underinsure yourself to cut costs, reasoning that an insurance payout is better than nothing.

Your insurer may pay out up to the amount specified by you. But this is a risky game to play because if an insurer thinks you’ve misled them, they may reject the claim entirely.

From an insurer’s point of view, deliberately lying during obvious questions just to get a cheaper premium may be a form of fraud.

Insurers also need to ensure that the premiums they charge reflect the risk of all their policyholders, and underinsurance messes with this delicate balance.

Insurer NFU Mutual said many homeowners are at risk of being underinsured because the cost of rebuilding their home has risen — even if their home prices have not risen.

This is due to the rising cost of building materials and labor.

NFU Mutual Home Insurance specialist Andrew Chalk said, “While home prices are falling, inflation is driving rebuild costs higher and higher, so now is not the time to cut rebuild coverage.”

Why is property underinsurance a particular risk?

It is easier to make a mistake when appraising your home and belongings than with your car, life insurance or vacation.

Homes vary enormously in price, and these values ​​can go up as well as 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 when the insurance was taken out, leading to accidental underinsurance if the insurer is not updated.

Valuing the contents in the home is also tricky, and most consumers are forced to rely on guesswork. Since our personal possessions tend to build up slowly over time, it’s easy to underestimate how much they would cost to replace.

But cars are relatively easy to value. Organizations such as Black Book constantly value cars, and consumers can get a pretty good idea of ​​their car’s value by looking at recent sales figures.

Also, cars don’t last as long as houses and don’t hold the same level of valuables as real estate, making appraising them easier.

That said, underinsurance is possible with motorcycle coverage, for example if a car is modified to increase its value but the owner fails to inform the insurer.

Underinsurance is also rare in life insurance, as consumers normally agree on a payout value with their insurer before making these deals, leaving little room for squabbling over the life of the policy.

Travel insurance customers can become underinsured, for example if they buy cover for fewer days than they need, or if their policy excludes valuables.

How do you check if you are underinsured?

Before taking out contents insurance, first check how much your belongings are worth. Do this before purchasing home contents insurance, and at intervals afterwards, or if you buy something particularly valuable.

Most home insurance policies will replace lost items as new, so work out how much it would cost you to replace everything at current prices.

The ABI says items that are often overlooked are carpets, furniture, soft furnishings, cutlery, collectibles and white goods.

Keep in mind that items in your yard or shed may not be covered by the terms of your home contents insurance policy, so check your policy terms before taking it out.

High value items may need to be appraised by a professional. This includes musical instruments, bicycles, antiques and jewellery, but this depends on your insurer.

Also note any “single item limits” in your cover. This means that an insurer limits the amount it will pay for an item if you need to make a claim.

If you own anything worth more than the single item limit on your insurance contract, tell your insurer and they should add it separately to give you peace of mind.

If you are already insured, check whether there is a difference between the value of what you own and what you are insured for.

If there is a gap, contact your insurer to let them know. They may allow an immediate change to your policy, or advise you to wait until it’s time to renew.

For home insurance, you can either ask a surveyor to determine 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 intervals, or if something has happened that has significantly increased the value of your home.

A common mistake is to assume that your rebuild cost is the price of your property, or its mortgage value. But the actual cost of rebuilding may be higher than this, including the cost of labor and materials.

Will insurers cancel my policy if I am underinsured due to a genuine error?

Probably not. There’s a law that describes how insurers deal with underinsurance, but it boils down to this: If you’ve made an honest mistake, you should get a fair deal when you file a claim. You may not get back the full value of your lost items, but you should get something.

The law in question is the Consumer Insurance (Disclosure and Representations) Act 2012, commonly known as Cidra.

This law says that if a consumer takes reasonable care that he is not underinsured and the fault was not reckless or intentional, his insurer must act fairly.

That means it’s unlikely the company would tear up a consumer’s policy just because of underinsurance.

My insurer has never asked me what my assets are worth – am I uninsured?

You may not be. Some insurance contracts allow an unlimited payout for property in a home, or cover you for the entire rebuilding cost. That takes away any worries about underinsurance.

Is it better to be overinsured rather than underinsured?

Overinsurance is where a consumer has too much coverage – the opposite problem of underinsurance.

In general, there isn’t a huge problem with being overinsured, but it probably means consumers pay higher premiums for coverage they can’t take advantage of.

Insurers do not pay out more than the actual value of your property or contents.

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