Under-Insurance: How could it effect you?

This Diagrams shows the lines of business most likely to suffer

Although a pretty self-explanatory term, this particular issue within the insurance industry is one that has been growing consistently throughout the last decade.

Insurance can be defined as a risk transfer mechanism, allowing the consumer complete piece of mind that if anything were to happen the financial burden would not fall completely on them. For many of the risk averse insurance is a necessity and knowing that protection is in place allows them to explore and grow in all aspects of their lives not always worrying what could be around the corner.

That being said, imagine the security of insurance can’t be relied upon when you need it the most? Under-Insurance can put your claim in to disrepute.

How can Under Insurance occur?

When taking out an insurance policy the consumer tells the insurer/broker the value of what they want to insure whether it be buildings and contents, commercial property or business interruption the principal always remains the same, it is very likely it the estimate must be provided by the consumer. Following a claim, the insurer sometimes decides that the sum insured is not enough to cover the full value of the claim. (image to the right shows the Lines of business most likely to suffer).

One of the main concerns this circumstance can cause is when the insurer chooses to apply average to the claim under an average clause:

sum insured

true value at risk

x loss = claim sum paid

For example, you insure your house for £200,000. However, the full cost to rebuild your house is actually £300,000. In this case you have only insured a proportion (2/3rds) of the rebuild cost. If there is then a fire, and the repair costs are £60,000, the insurer will only pay £40,000 or 2/3rds of your claim for the repair costs of £60,000. This is because you only insured the house for 2/3rds of the cost of rebuilding it.

Although average clauses are common in household policies, not all policies will have one. The Financial Ombudsman state: “We occasionally see complaints where insurers have tried to apply average to a claim when there is no average clause in the policy.” So everyone reading this please do keep an eye out!!!

How you can avoid this issue

Accurate Amounts – Very often the insurer will rely on the estimate you provide for replacing the insured property/item, instead of carrying out a site visit. Using tools such as https://calculator.bcis.co.uk/ of the Royal Institution of Chartered Surveyors (RICS) who are commissioned by The Association of British Insurers (ABI) provide general guidance to help you check the adequacy of your sum insured.

Index Linking – Including this within your policy is also a good way to ensure your policy keeps up to date with the ever-changing rate of inflation. This can play apart in your premium slightly increasing so after reviewing your amount get in touch with your insurer or broker and make changes accordingly.

Renewals – Take advantage and re-evaluate what your insurance covers. You may of bought an expensive piece of jewellery or a new television in the last year, treat your renewal as a reminder. if you are aware of your high article limit and the item does exceed this make insurer aware immediately.




Insurance Times

Financial Ombudsman