The impact of underinsurance

All policies contain an underinsurance clause; also known as the ‘average clause’.  So, what does this mean? Basically, it means that if your building is not sufficiently insured the insurer can reduce the amount they’ll pay out in the event of claim.

At the commencement date of your insurance policy, it is your responsibility to ensure the sum you have chosen to insure for is adequate to replace the insured property in the event of a total loss. If it is not, then insurers are within their rights to reduce any claim you make under the policy by the percentage of underinsurance.

For example – if you insured for £500,000, but the true reinstatement value is £1,000,000, insurers could choose to pay only 50% of any claim. The insurer has only received premium for £500,000 not the £1m. The clause makes sure you only get what you are paying for.

You will no doubt appreciate that if this relates to the insurance on your home you would be left with a substantial sum to fund to ensure a full rebuild could take place.

So now we need to consider how you can protect yourself and make sure the sum insured at the start of your policy is correct.

The only way to do this is to ensure you obtain a reinstatement cost assessment (RCA), often referred to as a valuation, from a qualified RICS accredited professional valuer. We can provide you with details of firms able to carry out this work.

If you act on the surveyor’s rebuilding cost assessment figure it will often be possible to arrange for an insurance company to waive the underinsurance clause in view of the fact you have had a professional reinstatement cost assessment.  However, you must ensure the reinstatement cost assessment is refreshed every three years to ensure the waiver remains in place.

If an RCA has not been carried out in the months leading up to your renewal the insured amount is subject to index-linking at an amount recommend by the insurer to help keep up with inflation.