The danger of underinsurance & how to stay protected

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. 

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. 

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). 

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. 

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