How to avoid under insuring your Home

Under insurance is the term used when a homeowner insures their property and contents for a lower amount than their true value.  There can be several reasons a homeowner might do this:  

• It could be the homeowner finds it difficult to estimate what it costs to rebuild their home,

• or they may not be fully aware of the true value of their property or possessions, 

• they may simply forget to amend their policies as they make home improvements or buy new contents for their homes,

• or it could be they are looking for a cheaper annual premium and so deliberately under insure. 

Whatever the reason, it is usually only in the event of a claim that the full consequences of under insurance is realised. 

Although homeowners are not legally obliged to take out home insurance, if they have a mortgage on the property, their Bank or lender can insist that they have buildings insurance so they can afford to rebuild their home if it is destroyed.  It is very important, therefore, that insurers and brokers advise their clients to insure their home and contents for the correct amounts, in case there is a claim over the course of the policy.  Under insurance can have a severe impact on the successful settlement of a claim and can subsequently result in major financial hardship to the homeowner.  Whilst it is important not to over insure (where a policy holder has bought so much coverage that it exceeds the actual cash value or the replacement cost of the risk or property insured), it is essential that correct cover is in place.

Some insurance companies automatically increase the amount of the buildings and contents cover when they renew household policies each year.  This is called index-linking and although it helps avoid being under insured as it increases the amount of cover in line with inflation, the cost of replacing items changes so often that sums insured need to be reassessed in line with these changes.  It is therefore very important to advise policy holders to regularly check the amount of cover they have so they are not under insured or over insured.  It is also important that policy holders insure for the re-build costs of their home and not the re-sale value as often these figures can be confused.   

If your policyholder happens to find themselves in the unfortunate position of having a claim on their policy and they have under insured the buildings and contents, some Insurance Companies will apply Average.  This is a proportional reduction in settlement of a claim.  For example, a property insured for €200,000 but actually costs €250,000 to rebuild.  In this case, the property is only insured for 80% of the sum it should be.  Claims will be settled on this basis – if the property suffered water damage of €10,000 the insurers would only pay a maximum of €8,000 for the loss. 

In general, policyholders are unlikely to be experienced in calculating such costs and it can be difficult for them to estimate sums insured.  Most Home Insurance policies state that the Policyholder must at all times, keep the sums they have insured for their Buildings and Contents at a level which represents the full reinstatement value or full value.  In addition, if home improvements have been carried out, such as the building of an extension or the conversion of an attic or if additional contents are purchased, the sum insured should be increased to reflect this.  If a Policyholder is unsure of the rebuilding cost of their home a useful website from the Society of Chartered Surveyors in Ireland can assist them with a Rebuilding Cost Calculator. This can be found at www.scsi.ie

To avoid under insuring, it is a good idea to review the buildings and contents cover with the policyholder at least once a year to make sure they do not run into trouble in the event a claim does arise.  You will be surprised at how much may have been added to an average household sum insured over a year. A good idea is to advise policyholders to walk through each room in their home, listing every item they can see and calculating its value.  They should include everything from curtains to carpets and everything in between, remembering that items stored out of sight are often at risk of being forgotten.  Contents stored in garden sheds such as tools and lawnmowers and items stored in attics or lofts such as luggage, linen or glassware should be considered also when doing up their inventory.  For items like electronics, remind the policyholder to take note of the make, model and serial numbers as this is particularly important in the event of a theft at their property.  Cataloguing these serial numbers will allow the Gardai to identify them if they are recovered.  It helps to make reviewing contents and policies a regular habit.    Not only will this ensure that policyholders are adequately covered but could also help to avoid financial stress at a later stage.