Underinsurance and the Dangers for You and Your Clients
Underinsurance is currently an issue in the UK for all lines of insurance, including property. 2021 data from Rebuild Cost Assessment shows that 80% of UK properties are underinsured.
What is underinsurance?
Underinsurance is when the rebuild or replacement cost of a building and/or contents exceeds the amount of cover provided by an insurance policy.
Rebuild Cost Assessment has found that underinsured properties are covered on average for only 68% of the amount they should be.
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What does it mean for the policyholder in the event of a claim?
In the event of a claim, if they are found to be underinsured, the amount the policyholder receives might not cover the costs of replacing or repairing the damage. If the building cannot be restored to a liveable condition, this could mean the occupants being without a home.
This can also be an issue for unoccupied homes going through probate. If the necessary funds are not available to make repairs, it could affect the new owner moving in, selling, or letting the property.
Underinsurance could have a detrimental effect on the value of the property if the homeowner did look to sell without making the needed repairs. Being underinsured could mean the market value of the property seeing a significant reduction. By making sure the correct rebuild amount has been entered when taking out insurance, this could be avoided.
Underinsurance and the Average Clause
Most insurance companies have an Average Clause within their policy wording. Under this clause, an insurer can reduce the amount a policyholder claims by the same proportion as the amount of underinsurance.
For example, if a property has a reinstatement value of £750,000 and the policyholder needs to claim £50,000 for repairs due to flood damage, they might assume the level of cover is adequate. However, if the insurer can establish the total cost to rebuild the property is £1 million, they can claim that the policyholder had inadequate cover in place. In this case, the cover amounts to 75%, leaving a 25% shortfall or ‘underinsurance gap’.
The £50,000 claim would receive a pay out of £37,500, leaving the owner liable for the £12,500 difference.
The Average Clause might not be applied in all cases, as some companies provide a cushion of 15% for underinsurance. However, this is not to be relied upon and it is important to ensure a suitable level of cover is obtained.
Why has underinsurance become more of an issue?
Underinsurance has always been a pitfall to avoid. However, in recent years the impact has increased due to issues occurring globally. As with your weekly grocery shop and gas and electricity prices, rebuild costs and labour costs are increasing. Supply and demand for materials and transport are struggling to keep up, driving costs higher. Taking these factors into account, it is vital that the amount your property is in insured for is accurate.
According to the Royal Institution of Chartered Surveyors (RICS), the cost of construction materials in the UK has reached a 40-year high.
These factors have had a knock-on effect on insurance premiums. Index linking, which is used to help ensure the property is not underinsured due to the adverse effects of inflation, is also increasing as a result. However, if your starting figure is already under the required level for rebuilding the property, you might still be underinsured after the increase in the sum insured by index linking. Possible rate increases from the insurer should also be taken into account.
What can be done to help ensure a property has a suitable level of cover?
A full survey of the property can help to provide an idea of rebuild costs, as well as any hidden issues. Another option is a remote survey, but this might not be as accurate.
You can also visit the Association of British Insurers (ABI) website and use their rebuild cost calculator for an indication of rebuild value. However, if the property is a listed building, some insurers may also require a surveyor’s report to confirm the rebuild value is correct.
Calculating the necessary amount for contents cover
There is no quick and easy process to accurately estimate the value of the contents in a home. Property owners may want to keep a record of the items kept in the property and estimate the replacement value before taking out insurance.
If you are unsure what would count as contents, imagine the property being tipped upside down. Vasek Insurance would classify anything that falls as contents, as do other insurance providers.
Many content insurance policies work on a ‘new for old’ basis. For example, if your computer is five years old, it would be replaced with a new model with the equivalent specification, not the very latest model.
What does the issue of underinsurance mean for solicitors?
As professional acting on behalf of a client, it may be the solicitor’s responsibility to ensure the property has suitable cover. The same goes for the executor of property in probate. Solicitors may be held accountable for such an error, in which case their firm’s Professional Indemnity cover may be required.
Finding suitable cover
Whether the insurance is for your own property or you are acting on behalf of a client, ask yourself if the amount of cover offered by a policy is suitable. If the worst was to happen, do you have the protection you need? Comparing insurers and policy options can help to check whether one is offering more protection than another.
At Vasek Insurance, we aim to help our customers find suitable cover for their property’s needs. Our Unoccupied Property Insurance for homes that are empty due to probate or the owner moving into care provides £1 million buildings cover as standard when the property has no more than 7 bedrooms.
As such, we do not need to know the rebuild cost, to help provide a quick and simple process for professionals such as executors or solicitors acting on the homeowner’s behalf when searching for empty home insurance.
Our product also provides £10,000 contents cover and the option to increase the sum insured if required.
Cover is subject to the full terms and conditions of our policy wording, which can be read on our website.
If you would like to discuss our product further or get a quote, call me on 07833446070 or email firstname.lastname@example.org.
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Vasek Insurance accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
Vasek Insurance is a trading name of Arthur J. Gallagher Insurance Brokers Limited, which is authorised and regulated by the Financial Conduct Authority. Registered Office: Spectrum Building, 7th Floor, 55 Blythswood Street, Glasgow, G2 7AT. Registered in Scotland. Company Number: SC108909.
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