How to tell if your home is underinsured

Up to four in five UK households are underinsured and risk getting little to no payout if they need to make a claim.

Underinsurance is when someone’s insurance policy doesn’t cover them for the total cost of replacing their home or possessions.

It generally happens by mistake, but it can lead to problems that are very real – and very large. Insurers reserve the right to throw out claims when someone is underinsured, or only pay out a fraction of the payout the policyholder needs.

This is how to work out if you are underinsured, and what to do to fix the problem.

Safe as houses? Underinsurance is a problem that mostly affects properties, and is less common on motor, travel or life insurance – though that can happen

What is underinsurance?

Underinsurance is when a customer’s insurance policy does not fully cover them for the replacement value of their house or goods.

It is normally a contents insurance problem, though it can crop up with buildings and travel insurance too.

For example, if a consumer has £10,000 of possessions, but only buys home insurance with £5,000 of contents cover, then they are 50 per cent underinsured.

It is a surprisingly big issue. Around 80 per cent of households are underinsured, or four in five, according to insurance broker Macbeth.

Underinsurance normally occurs when insurance customers are asked how much cover they need, or how much their house would cost to rebuild, but get it wrong by undervaluing.

Why is underinsurance a problem?

Underinsured customers can have their claims rejected, or only partially paid out.

Take our home insurance example above. If the homeowner’s house burned down and they lost everything, then their insurer may only pay out the ‘sum insured’ of £5,000, leaving the policyholder £5,000 out of pocket.

The Financial Ombudsman Service watchdog said it has come across several cases where claims were rejected in this way.

Equally, the insurer may shoot the claim down entirely and keep all the premiums the customer has paid up until that point.

Insurers take a dim view of underinsurance. This is because an underinsured person is likely to be paying lower insurance premiums that do not properly reflect their risk to the insurer.

Not covered: In the worst case scenario, being underinsured means losing money if you need to make a claim – or even having the entire claim thrown out

It may be tempting to deliberately lie and underinsure yourself in order to bring your costs down, with the reasoning that some insurance payout is better than nothing.

It may be that your insurer will pay out up to the level you stated. But this is a risky game to play, because if an insurer thinks you have been misleading it, it can decline the claim entirely.

From an insurer’s point of view, deliberately lying in the face of clear questioning just to get a cheaper premium may be a form of fraud.

Insurers also have to make sure the premiums they charge reflect the risk of all their policyholders, and underinsurance messes with this delicate balance.

Insurer NFU Mutual said many homeowners risk being underinsured because the cost of rebuilding their homes has risen – even if their house price has not.

This is due to the rising cost of building materials and labour.

NFU Mutual home insurance specialist Andrew Chalk said: ‘Although house prices are falling, inflation is sending rebuild costs ever higher, so now is not the time to be reducing rebuild cover.’

Why is underinsurance on property a particular risk?

It is easier to make a mistake when valuing your house and possessions rather than your car, life insurance or holiday.

Homes vary hugely in price, and these values can go up as well as down. Someone might live in the same house for decades, making it easy to lose track of the current value of their property.

Home improvements can also lead to houses being worth far more than they were when the insurance policy was taken out, leading to accidental underinsurance if the insurer is not updated.

Valuing the contents within the house is also tricky, and most consumers are forced to rely on guesswork. Because our personal possessions tend to build up slowly over time, it is easy to underestimate how much these would cost to replace.

But cars are comparatively easy to value. Organisations such as Black Book value vehicles constantly, and consumers can get a pretty good idea of their car’s value by checking recent sales figures.

Also, cars do not last as long as houses do and do not contain the same level of valuables as property, making valuing them simpler.

That said, underinsurance is possible with motor cover, for example if a car is modified to improve its value but the owner does not inform the insurer.

Underinsurance is also rare in life insurance, as consumers normally agree a payout value with their insurer before taking these deals out, leaving little room for quibbling during the policy term. 

Travel insurance customers can find themselves underinsured, for example if they buy cover for fewer days than they need, or if their policy excludes valuables.

How to check if you are underinsured

For contents insurance, first work out how much your belongings are worth. Do this before taking out contents insurance, and at intervals afterwards, or if you buy something particularly valuable.

Most home insurance deals replace lost items as new, so work out how much it would cost you to replace everything at today’s prices.

The ABI says commonly overlooked items include carpets, furniture, soft furnishings, cutlery, collectibles and white goods.

Remember that items in your garden or shed may not be covered by the terms of your contents insurance deal, so check your policy wording before including these.

High-value items may need to be valued by a professional. These include musical instruments, bicycles, antiques and jewellery, but this depends on your insurer.

Also watch out for any ‘single article limits’ in your cover. This means an insurer caps the amount it will pay out for any one item if you need to make a claim.

If you own something worth more than the single article limit in your insurance contract, tell your insurer and they should add this separately to give peace of mind.

If you are already insured, check to see if there is any gap between the value of what you own and what you are insured for.

If there is a gap, contact your insurer to let them know. They may allow a change to your policy immediately, or may advise you wait until it is time to renew.

For buildings insurance, you can either get a surveyor to value your home’s rebuild cost, or use a free online tool. The ABI has such a tool here. 

It is important to do this at intervals, or if something has happened to significantly increase the value of your home.

A common mistake is to assume that your rebuild cost is the price of your property, or its mortgaged value. But the true rebuild cost could be higher than this, and includes the cost of labour and materials.

Will insurers cancel my policy if I am underinsured due to an honest mistake?

Probably not. There is a law that sets out how insurers deal with underinsurance, but it boils down to this: if you made an honest mistake, you should get a fair deal when you make a claim. You may not get the full value of your lost items back, but you should get something.

The law in question is the Consumer Insurance (Disclosure and Representations) Act 2012, known as Cidra.

This law says if a consumer takes reasonable care not to be underinsured, and the mistake was not reckless or deliberate, their insurer must act fairly.

That means it is unlikely the firm would rip up a consumer’s policy just for underinsurance.

My insurer never asked me what my possessions are worth – am I uninsured?

You might not be. Some insurance deals allow an unlimited payout for goods within a house, or cover you for the full rebuild cost. That removes all worries about underinsurance.

Is it better to be overinsured rather than underinsured?

Overinsurance is where a consumer has too much cover – the opposite problem to underinsurance.

Generally there is no major problem with being overinsured, but it is likely to mean consumers are paying higher premiums for cover they cannot use.

That is because insurers will not pay out more than the true value of your building or contents.

This post first appeared on Dailymail.co.uk