Understanding Underinsurance

 

Ensuring that your sums insured are accurate is crucial due to the risk of underinsurance. Most insurance policies include an underinsurance clause known as ‘average’. This clause stipulates that if your sums insured are too low and you make a claim, the payout can be proportionally reduced. 

 

Consider a medium-sized property constructed of brick with a pitched tiled roof, insured for £450,000. Following a storm, the ground floor is flooded, resulting in £80,000 worth of damage. However, upon investigation, the true rebuild cost of the property is determined to be £600,000. This figure encompasses costs such as rebuild, demolition, pathways, professional fees, garden fencing, and statutory services. 

 

The property was underinsured by 25%. Consequently, the ‘average’ clause reduces the claim payment by 25%, resulting in a payout of £60,000. The policyholder is then responsible for covering the shortfall to complete the repairs. 

 

 

Various factors can contribute to underinsurance. For instance, the impact of Covid-19 lockdowns disrupted material production, coupled with increased demand. Additionally, delays in EU imports due to Brexit have further compounded the situation. 

 

Over the past 12 to 18 months, the costs of materials and labour have surged significantly. According to the Building Cost Information Service (BCIS), the general building cost index surged by 10.2% in September 2021 compared to the previous year. The BCIS Materials Cost Index, represents a rise of approximately 19.7%, played a substantial role in this increase. BCIS noted in 2021 that the cost of materials required to construct a three-bedroom semi-detached house had risen by 14%, or around £7,300, between January and September, with an anticipated further increase of 1% or £600 by year-end. Supply challenges, as highlighted by the Construction Leadership Council, persist, with shortages expected to continue, particularly concerning bricks due to domestic production limitations. 

 

 

As your trusted insurance broker, Hedon Insurance is dedicated to helping you navigate the intricacies of insurance coverage to ensure adequate protection against potential risks. Whether you are renewing your policy or contemplating changes to your coverage, please get in touch for expert advice and personalised solutions tailored to your specific needs. 

 

Understanding the nuances of underinsurance is vital to safeguarding your financial stability. By staying informed, regularly reassessing your coverage, and consulting with your insurance broker, you can mitigate the risks associated with underinsurance and enjoy the assurance of being adequately protected. 

 

Remember, when it comes to insurance, it's always preferable to be over-prepared than underinsured. 

 

To check your sums insured, you can get your property professionally assessed by a RICS qualified surveyor or using a rebuild calculator. 

 

 

 

Some policies are Index Linked at renewal. Please refer to your insurance adviser to confirm the percentage applied. This increase only protects you if your original sums insured were accurate.