The danger of underinsurance & how to stay protected


Imagine setting sail on open waters thinking you’re fully equipped for the journey ahead, only to find out your safety gear isn’t up to the task when a storm hits, and your safety net has big gaps. Underinsurance is that storm, lurking unnoticed until the moment you need to make a claim, and suddenly, you find the safety net you thought you had is full of holes. 

In this article we explore how underinsurance can affect you, the common reasons behind it, and more importantly, the ways that you can stay protected. 

What is underinsurance?

Simply put, underinsurance is the gap between what your insurance policy says you will be paid vs the actual cost to replace or repair your asset. 

Whether it’s your home, car or valuable collection, underinsurance can leave you worse off financially if a disaster strikes.  

Imagine being faced with a major repair bill and finding out that your insurance policy doesn’t cover the full cost. That’s underinsurance — a risk that’s easily overlooked but can have significant consequences. Being caught underinsured is a risk that nobody should be looking to take. What’s scarier is that it can even happen without you knowing. 

But some people choose to be underinsured. Research from the Association of British Insurers (ABI) found that 1 in 4 households don’t cover their contents which means they wouldn’t get anything paid out to replace what they had lost. 

Buildings insurance valuation company Barrett Corp and Harrington (BCH) found that 75% of the buildings they valued in 2022-23 were underinsured, with customers significantly underestimating the level of insurance they needed to protect their assets. 

Does it matter if I’m underinsured?

Yes, it does. It’s a serious matter if you’re underinsured. And we’re not just saying this as we work with insurance companies; we’re saying it because we genuinely care about protecting the things that matter most to you. 

Being underinsured is like buying VIP weekend tickets for the Formula 1 Silverstone Grand Prix, and instead only ending up being able to watch the practice races on the Friday. You pay into an insurance policy expecting full coverage, but when it’s time to claim, you find out you’re not as covered as you thought you were. 

Though the financial burden is a big part of it, there’s also the emotional aspect that you didn’t sign up for — the stress and worry of figuring out how to cover the extra costs. Whether it’s repairing your home or replacing valuables, underinsurance can turn an avoidable situation into a major headache.

There’s also measures that people can take to protect assets including protecting a home from storm damage which can prevent the need to make a claim. 

If you think you might be underinsured, we provide some helpful guidance later in the article which can help you. 

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What can cause underinsurance?

Understanding the root causes of underinsurance is crucial. Several factors can lead you to be underinsured, often without realising it until it’s too late. Here are the main causes: 


1. The rise of inflation

Inflation is a pivotal factor that contributes to underinsurance. The cost of materials, labour and other expenses tend to rise which is where people often find themselves under protected. This is especially true for property and rebuild costs. 

We recently wrote an article on understanding insurance inflation and why premiums have increased which explains this in more detail. 


2. Not reviewing or updating your insurance cover

Over time, life changes – you might add an extension onto your home or you might acquire new personal belongings. Without a regular review, your insurance policy may not reflect your current needs which leads to a gap in your cover. This oversight is particularly critical in markets where the cost of replacements or repairs can escalate, thanks to inflation. 


3. Underestimating asset values

Whether it be jewellery, art or the cost to rebuild your home, it’s common to overlook how much these items are worth or how much their value has increased over time. The initial value set at the start of an insurance policy is often far off the true value of assets, especially when policies aren’t reviewed. 


Explaining average clause and how it affects insurance claims

The average clause is a critical yet often misunderstood aspect of insurance policies, particularly in home and contents insurance. This clause is written into policies, and it comes into play when an asset is found to be underinsured. Claims are paid in proportion to the amount of underinsurance, so it directly affects how much the insurance company will pay out. 

The average clause ensures the policyholder holds a portion of the risk if the sum insured does not represent the full value of the asset. It’s designed to encourage policyholders to insure their assets for the correct amount. 

In essence, the application of average clause can significantly reduce the amount you receive from a claim. It’s designed to encourage policyholders to insure their assets for the correct amount. And if they aren’t insured appropriately, they would be underinsured. 


Underinsurance examples

Let’s look at some examples of underinsurance. 


An infographic showing how underinsurance works with Home Insurance.

Home Insurance

Imagine this. Peter has lived at his family home for 15 years, and the building is made up of old stone. At the time of moving in, Peter insured his home for £200,000 which at the time covered the rebuild cost, but he haven’t reviewed his cover since. However, the actual cost to rebuild the same home in today’s market is £400,000. 

If a disaster strikes and Peter’s home needs to be completely rebuilt, the average clause is applied because his cover is only 50% of the necessary rebuild cost. 


An infographic showing how underinsurance works with Contents Insurance.

Contents Insurance

Now let’s look at how underinsurance can be applied to contents insurance. 

Linda valued the contents within her apartment at £30,000. This includes her furniture, high-value jewellery and two designer handbags. Unfortunately, a fire broke out and damaged her items beyond repair. After a loss adjustor attended her apartment to assess the damage, the total value of Linda’s items turned out to be £50,000. This is because her high-value jewellery and designer handbags had risen in value significantly. 

Under the average clause, since Linda was only insured for 60% of the actual value, she only got a 60% payout (£30,000) of the total claim (£50,000). 

Overcoming and avoiding underinsurance: What you should do

Realising you’re underinsured can feel daunting. But it’s a situation that can be rectified or even avoided with some proactive steps. 


Step 1: Review and update your insurance policies

Start by thoroughly reviewing your existing insurance policies. Look for limits of coverage, note any exclusions and compare these details against the current value of your assets. This step helps to identify any gaps in your coverage. 

Have a think about any changes that may have happened to your assets recently too. Extended your home? Bought a new high-value watch? Each of these scenarios should trigger a review of your insurance cover. Ensure your policy reflects new additions to guarantee they’re protected. 

Pay special attention to terms like the ‘average clause’ and any exclusions in your policy. If something isn’t clear, don’t hesitate to ask your insurer for clarification. 

Top tip: Opting for the cheapest insurance option can be tempting, but it might not offer the comprehensive cover you need. Balance cost with the level of protection you’ll be getting. 


Step 2: Accurately value your assets

It’s easy to underestimate the value of your possessions. Assess the current value of the assets that you have insured. You could do this yourself, or for increased peace of mind you could get a professional valuation for your asset. This will help to avoid unexpected shortfalls in the event of a claim. 

To keep ahead of the curve, stay informed about market trends and consider how they might affect the value of your insured assets. 


Step 3: Consult with your insurance company

Once you have a better idea of the cover that you need, liaising with the insurer can help you adjust your policy. This might mean adjusting your policy to increase your cover or taking out additional policies for areas that were previously underinsured, or not insured at all. 

A conversation with a professional can shed light on gaps in your coverage and guide you towards the right solutions. Our Personal Client Managers are experienced in this, so even if you’d just like to chat about your current coverage, we’d be more than happy to advise. 

By following these tips, you can limit the risk of underinsurance, ensuring that when life’s unexpected turns come your way, you’re fully prepared to tackle them without compromising your financial security. 

An advisor helping clients with insurance.

How Norton can help you steer clear of underinsurance

At Norton, we’re dedicated to guiding you and ensuring you’re not caught off guard by underinsurance. We can assess your coverage needs and tailor a policy that ensures you’re fully protected every time your renewal comes around. 

We tailor insurance to fit your unique needs, updating your policy as your assets evolve. We can educate you on the intricacies of your insurance, including the average clause, empowering you to make informed decisions. 

In the event of a claim, you’re not alone. Norton stands with you, guiding you through the process to ensure a smooth and fair settlement. 

Our customers seem to agree – we recently were awarded the highest possible accreditation from Feefo for providing an ‘outstanding service to customers. 

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Underinsurance: FAQs

How can I tell if I'm underinsured?

Regularly review your insurance policy details and compare them with the current value of your insured assets. If there’s a significant gap between your coverage amount and the actual cost to replace or repair your assets, you may be underinsured. 

What are the main causes of underinsurance?

The primary causes include not regularly updating insurance policies to reflect current asset values, underestimating the cost of rebuilding or replacing assets, and selecting lower premiums over comprehensive coverage. 

How does the average clause affect my insurance payout?

The average clause adjusts your claim payout based on the level of underinsurance. If you’ve insured an asset for less than its full value, the clause reduces the claim amount proportionately, leaving you to cover the difference. 

What steps can I take to avoid underinsurance?

To prevent underinsurance, carry out annual reviews of your insurance policies, ensure accurate valuation of your assets, understand your policy’s terms, and consult with insurance professionals to adjust coverage as needed.