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You may notice reference to ‘underinsurance’ in the press, as it’s estimated that 40% of insurance claims get reduced because the policyholder isn’t insured for the correct amount.
Sometimes it’s accidental. You buy a second-hand piece of equipment for £5,000, so you increase your policy by £5,000 without realising that you’ve got a ‘Replacement as New’ policy and this piece of kit is £50,000 to replace brand new, which is therefore the amount you should have increased your policy by.
Sometimes it’s due to ignorance. When you buy a property for £250,000, buried in the small print of the valuation will be the REBUILDING COST which can be significantly higher or lower than the sale cost. It’s the Rebuilding Cost that insurance policies are based on, and therefore it’s this sum you need to base your policy on.
The importance of Average
Have you ever heard the term ‘average’ in relation to insurance? If so, this isn’t the average that you were taught at school, but an insurance term that means if you are under-insured your claim can be refused or significantly reduced.
Here’s an example:
Let’s say your total Office Contents are insured for £10,000 on a ‘replacement as new’ basis and the water pipe above your office fails, resulting in water pouring all over your hi-tech printer, wrecking it beyond repair!
The replacement printer is £5,000, which makes your insurance company sit up and take note, as that implies it’s 50% of the entire value of your Office Contents. They send an Adjuster out, and whilst they can’t argue that the printer is indeed worth £5,000, it suggests that the rest of your Office Contents (chairs, desks, laptops etc) would cost a further £20,000 to replace - meaning you are underinsured.
So, you still try and claim for £5,000, but you are under-insured to the ratio of £10,000/£25,000 (40%) - so instead of getting £5,000 for your printer you only get 40% of that much (£2,000).
This can cause much unhappiness and disgruntlement, but virtually every property insurance policy in the UK contains an ‘average’ clause, which means the onus must always be on you to make sure you are insured for an adequate amount. Insurers are often prepared to overlook 5% or 10% differences between what the sum insured actually is and what it should be, but much more than that will see your claim reduced.
And we're here to help too.
- If you need any help getting your buildings valued, there are a number of Rebuilding Cost Calculation Services we can help you with. Just get in touch to find out more.
- And if you need any help working out your Contents Sum Insured, the simplest way is to go through room by room and add up what it would cost to replace everything, from the bespoke pencil sharpener to the wall-mounted 70” TV screen. You could end up being very surprised!
