What happens if my home is underinsured?
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Home insurance can give you reassuring peace of mind, knowing that you’re covered if something unexpected happens. But underinsuring your home and possessions can mean you don’t get the compensation you need, leaving you to foot the rest of the bill yourself. Unfortunately, underestimating the value of your home insurance is easy to do. Here’s what happens if you’re underinsured and what you can do to avoid it.
What is under insurance?
Underinsurance is when the sum insured on the policy isn’t enough to cover your losses. In other words, if your home or belongings are damaged or destroyed, there isn’t enough money to cover the cost of repairing or replacing them.
For example:
- The sum insured on your contents policy is set at £10,000
- Your belongings are actually worth £20,000
- You are underinsured by £10,000
However, when it comes to insurance, the shortfall isn’t just the difference between what you need and the sum insured. Insurers can also apply something called the average clause. The application of this rule can have a big impact on the payout you receive and it could mean you end up with just a fraction of what you need, here’s how it works.
The average clause explained
The average clause is also known as the condition of average. It’s a formula that lots of insurers use and is triggered in cases of underinsurance. It means that insurers can reduce the payout they give you by the amount you are under insured by.
So, let’s take the same example with your home contents which is worth £20,000 but only insured on the policy for £10,000. This 50% difference is the amount you’re underinsured by which means any payout you get can also be reduced by 50%. If you made a claim for the full amount (£10,000) your insurer is within their rights to offer just £5,000 (50% less) which is considerably lower than the true cost to replace your possessions.
The average clause might seem a bit unfair but from the insurer’s perspective, undervaluing the items insured means you’re paying a reduced premium that doesn’t reflect the real cost of what you own. The condition of average is ultimately there to encourage all of us to think carefully about the value of items we’re insuring rather than just guesstimating.
Is the average clause applied to all claims?
If the average clause is something your insurer uses, it will be set out in your terms and conditions – so it’s worth checking your policy documents if you’re not sure.
If your insurer uses the average clause, it usually applies even if you haven’t made a claim for the full amount. For instance, using the previous example, if you claimed for £5,000 worth of damage to your contents, you’d receive just 50% of this, or £2,500.
What happens if my policy doesn’t mention the average clause?
If your insurer doesn’t apply the average clause, they’ll just pay out the amount set out in your policy. So, if it was agreed at £10,000, this is what you’d receive.
What is a single item limit?
The single item limit (or single article limit) is the maximum amount of money your insurer will pay out for any one item. The exact amount varies by insurer but it’s often around the £1,500 mark. That might sound like a lot, but if you’ve got a pricey engagement ring or expensive musical instruments, it may not be enough.
You can always speak to your insurer about increasing the limit, or you can insure high value items separately with their own policies.
How can I avoid underinsuring my home and belongings?
Underinsuring your home and personal possessions is so easy to do but it can leave you significantly out of pocket. To make sure you have the cover you need, think about:
- The cost to rebuild – your buildings insurance should be enough to cover the cost of rebuilding your home if it were completely destroyed. Most insurers use a formula to work this out but if you live in a home with non-standard features (for example a thatched roof) you may prefer to ask a surveyor to assess your property. You can also use the rebuilding cost calculator from RICS and the Association of British Insurers (ABI).
- Assessing the contents in each room – this takes time but going from room to room noting down what you own can help you accurately value your belongings.
- Check the single item limit – unless you have separate policies for expensive items, the single item limit needs to be high enough to cover the cost of your priciest item.
- Remember outdoor contents – home insurance also covers your outbuildings like sheds and garages along with their contents, so don’t forget to factor in things like lawnmowers and garden equipment.
- Update your policy – if you buy anything expensive for your home or you extend, you should let your insurer know so they can update your policy.
Home insurance that’s fit for purpose
Home insurance is there to protect you from financial loss so it’s always important to make sure your policy accurately reflects the value of your home and its contents.
To find good value home insurance that gives you the protection you need, compare quotes right here.
Cheap Home Insurance in Your Area
Home insurance comparison panel includes dozens of insurance providers.