Underinsurance

December 16, 2024

Underinsurance

We talk a lot about underinsurance. With some help, it is a potentially costly problem that can be avoided.

Underinsurance occurs when someone buys insurance coverage, but the cover purchased is insufficient to meet its requirements in the event of a loss. This can leave you with large, unexpected bills, impacting your ability to recover from a loss.

You might not have enough insurance to cover a loss for many reasons, including miscalculating cover, out-of-date valuations, inflation, and changes to the cost of materials.

Recent stats reveal that 83% of UK properties were underinsured.

The financial impact of underinsurance can pose a severe problem for policyholders. Underinsurance is most evident when there is a claim, and the insurance coverage is insufficient to rebuild the property. In situations like this, most insurance policies have a clause called the “Average condition,” which adjusts the claim settlement by the amount of underinsurance.

Here is how average works in practice. Suppose the reinstatement cost of a property is £2,000,000, but it is only insured for £1,000,000 when a total loss occurs. In that case, the insurer will pay only £500,000, leaving the policyholder to cover the remaining cost.

Similarly, any partial loss will be reduced in the same proportion, considering any excess that applies.

Reinstatement Cost vs. Market Value.

Building insurance is based on the reinstatement cost of the building. Reinstatement covers total rebuilding costs, including debris removal, planning, and professional fees—often significantly higher than market value. You could be underinsured if you insure a property for the market value.

But underinsurance isn't just a property issue. Stock levels, business interruption periods, and cyber liability limits also need regular review.

If you have any questions about underinsurance or would like a confidential chat, contact us on 01843 293614.