Underinsurance - don't be fooled by a subject that doesn't make many headlines

Phil Bristow of Nsure
Phil Bristow of Nsure

A common complaint about Brexit dominating the political agenda is that other priorities such as long-term care, housing, transport etc are being sidelined.

There is a comparison in the insurance world where technology issues such as cyber risks, the use of artificial intelligence or driverless cars tend to overshadow some fundamental problems – and arguably one of the biggest is underinsurance.

The statistics (albeit anecdotal) are staggering. Not only do surveys indicate that up to 80 per cent of properties in the UK are underinsured, but they are frequently underinsured by 40 per cent or more, and if a large claim occurs many property owners face serious shortfalls in their insurance claims.

When a claim occurs on an underinsured property, insurers can reduce the claim because of the ‘average’ condition. It applies to most commercial property policies and if a building insured for £300,000 should have been insured for £500,000, the effect of 40 per cent underinsurance on a £200,000 claim will see the insurer only paying £120,000. An £80,000 shortfall.

Average is applied to the loss rather than the sum insured, so insurers will pay the full insured amount if a total loss occurs (on the basis the policyholder has already been penalised by failing to insure for the full amount).

It is with partial losses that insurers reduce the amount they pay, as can be seen in the example above.

Some insurers publicise ‘no average’ policies, but these claims can be misleading as insurers now have similar rights to reduce claim payments under the fair statement of risk provisions of the Insurance Act 2015.

The only ‘no average’ policies you can trust are those where insurers waive average if you have the property valued or accept their recommended sum insured.

So why do people underinsure? With some it is to save money (although it is a false economy if a claim occurs), whereas most just underestimate the cost of reinstating a property. Often, ‘extras’ such as architects and structural engineers’ fees, debris removal and compliance with up to date building regulations and legislation such as the Disability Discrimination Act are underestimated, all of which can be substantial.

Other frequent mistakes are not including foundations (even though they are rarely damaged) and basing the sum insured on using modern materials, that may not be possible for partial damage to an older building.

The safest way to avoid underinsurance on buildings is to have a professional valuation undertaken, but many policyholders are put off by the cost and take the chance that a claim won’t occur. Nowadays however, ‘desktop’ valuations are available using the likes of Google Earth and while they have their limitations, they can provide a very good guide as to whether your sum insured is in the ‘ball park’ and can cost as little as £100.

It is surprising how many property owners are prepared to take a chance with such a major asset, but it isn’t just buildings – underinsurance is an issue with many forms of insurance including machinery, contents and business interruption. I’ve touched on just some of the issues here: see more at https://nsureinsurance.co.uk/factsheets/