Why under-insuring your home and possessions could be financially fatal

When you take out home insurance you have to tell the insurer what you think the cost of rebuilding your home would be and the total value of all your possessions.

Many people guess to low, or deliberately provide a figure that’s less than the actual sums involved as they know it can help reduce premium payments.

Whatever the reason, under-insuring your property and the things you keep in it can be a fatal financial error.

Insurers and ‘averaging’

If you subsequently have to claim on your cover, the insurer, by sending a loss adjustor to make an assessment or by other means, may discover the undervaluation.

Whether the damage or loss you’re claiming for has been caused by flooding, a burglary or fire, the insurer may then decide to apply what’s known as ‘averaging’, or ‘applying the average’, to your claim.

‘Applying the average’ can hit a claim

‘Applying the average’ means that no matter what the value of the claim, the percentage you might get back is directly related to how much an insurer decides you’re under-insured for.

So, for example, if a fire destroys your kitchen, the rebuilding cost might be £20,000. However, if the insurer discovers that your total sum insured for buildings cover should be £240,000, but it’s in fact set at £120,000, you’ll only get back 50% of the claim for the kitchen fire as £120,000 is half of what the figure should have been.

Insurers re-calibrate the risk

Insurers do this because the overall risk the homeowner has been paying to have covered has actually been greater than the insurer thought.

So if the risk for buildings cover should have been double the sum in the policy, the pay out on any claim may only be half to match up with the risk profile.

Couple suffer burst pipe, but only get half the claim

The Daily Telegraph recently gave a good example of how under-insuring can also impact on claims which involve contents, and not just buildings.

A couple had got in touch with the newspaper whose home had been flooded by a burst pipe. The insurer estimated the total value of their home’s contents was £100,000, twice the figure of £50,000 the couple had given. The insurer therefore said it would only pay out half of the claim for the flood.

Insurers aren’t always right

Of course, insurers aren’t correct in all instances when they think they’ve spotted a claim where the claimant has been under-insured.

Some insurers can be prone to estimating on the upside; they know this is a way of reducing the pay outs they may have to make if the figure is greater than the figure given by the policy holders.

Using the Financial Ombudsman

If you disagree with your insurer you can take your case to the Financial Ombudsman and, in many cases, you’ll find a sympathetic ear. And insurers often don’t like having to go through the process of arguing a case, which can be time consuming and expensive for them, especially if the case is a dispute over only a few hundred, or even a few thousand, pounds.

However, if the dispute is over a contents or buildings claim worth a lot more than that, you’ll probably have quite a fight on your hands.

Getting a valuation right

As you can see, under-insuring yourself can cause great difficulty, and potentially means you end up not being able to afford either to rebuild your property or replace your possessions.

If you’re unsure about how to value your possessions or home’s rebuild costs get in touch with your insurer or insurance broker for guidance. And do it now; delay could prove financially fatal.

Policy Expert

If your home is your haven, you’ll want it to have the best protection. Compare home insurance quotes from our range of handpicked insurers and tailor a policy to suit you. For more information on Home Insurance from Policy Expert, speak to one of our experts on 0330 0600 600 or email ask@policyexpert.co.uk

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