The risks of underinsurance

Underinsurance in home insurance is a risk that often goes overlooked. 79% of UK homes are underinsured.

Many homeowners assume their existing coverage is enough without realising the financial impact of not fully insuring their property and possessions. Being underinsured can lead to substantial financial risk, and potentially, an inability to rebuild or replace what has been lost after a disaster.

Having the correct level of cover can mitigate this risk, and can often be seen as part of your investment portfolio as a hedge against the worst case scenario.

This post explores the key risks of underinsurance and how to avoid them, ensuring that you are fully protected.

What is underinsurance?

Underinsurance occurs when the sum insured on a home insurance policy is less than the actual cost to rebuild or replace the insured property and belongings. For instance, if your home is insured for £500,000 but the actual cost to rebuild it is £900,000, you are underinsured by £400,000. This difference can lead to significant shortfalls in coverage, which can be financially devastating in the event of a claim.

Risks of underinsurance

Reduced claims payout with average clause
Some policies (normally standard home insurance policies) include an “average clause,” which reduces claim payouts based on the level of underinsurance. For instance, if your property is insured for only 70% of its value, the insurer may reduce your payout by 30% for any claim. This clause can result in reduced settlements, adding to the financial burden after a loss.

Loss of personal investments
A reduced claim payout as a result of underinsurance might lead to you needing to draw on your personal savings and investments to make up the shortfall to rebuild your home. This can often be a substantial portion of your investment portfolio and can have serious financial implications.

Avoiding underinsurance: practical steps

Reassess property values regularly
Work with a professional appraiser to assess the current market value of your home and contents. Remember, your coverage should reflect the rebuilding cost, not the market value of your home, which can differ substantially depending on location and demand.

Specify high-value items
For items such as fine art, antiques, or high-value jewellery, ensure they are individually listed in your policy to cover their full value. rivr’s policies, for example, allow homeowners to cover such items through specific provisions, including extensions for market appreciation and appraisal updates​.

Consider rebuilding costs over market value
While the market value of a property can fluctuate, the focus for home insurance should be on the cost to rebuild your property to its original state. The rebuild cost should account for architectural fees, debris removal, and compliance with current building codes, which may be required after a loss.

Add coverage extensions where necessary
If your policy does not automatically include coverage for alternative accommodation or certain rebuilding costs, consider adding these extensions. Many insurers provide options for these additional covers to ensure you aren’t left out of pocket for temporary accommodation or special rebuilding conditions.

Unanticipated rebuilding costs
The cost to rebuild a home can vary significantly due to factors such as inflation, rising material costs, or changes in local building regulations. If you haven’t reviewed or updated your coverage in recent years, you may be underinsured due to increased rebuilding costs. Many insurance providers, like rivr, offer index-linking to adjust the sum insured in line with inflation, but it’s essential to regularly review and adjust your coverage based on accurate estimates of rebuilding costs​.

Conclusion

Underinsurance can have severe financial consequences. To protect yourself, it is crucial to review your home insurance policy regularly and adjust coverage as necessary to reflect current rebuilding costs and the full value of your possessions. Taking proactive steps now can save you from significant financial strain in the future. If you’re unsure whether your home and contents are adequately covered, speak with a member of the rivr team.