What Is Underinsurance?

Underinsurance happens when your insurance policy doesn’t provide enough cover to fully replace or repair what you’ve lost. It’s the gap between what you think you’re covered for and what it actually costs to put things right. Underinsurance can turn what should be a straightforward insurance claim into a costly nightmare.

Here’s everything you need to know to make sure you’re properly protected.

What does underinsurance mean?

Underinsurance is where the values you give to your home insurance provider for your home and possessions aren’t high enough. That could be because you’ve underestimated the rebuild value, or failed to add up all your home’s contents properly.

According to data from Rebuild Cost Assessment, 76% of buildings in the UK are underinsured by an average amount of 37%. And it’s not just buildings. Contents are frequently underinsured as well.

It’s really important to check the cover value of your buildings and contents insurance. If you’re underinsured, you could have an insurance payout reduced. That would mean you’d have to cover the extra cost out of your own pocket.

What causes underinsurance?

There are a few reasons you might be underinsured:

• Rising home value: Your home’s value doesn’t stay the same from one year to the next. Check your rebuild value every year, as this can be pushed up by overall house prices or rises in the costs of repairs or building materials.
• Home improvements: If you’ve had a loft conversion, extension or other major work done, your home will probably cost more to rebuild from scratch.
• Inflation: Just as the value and rebuild cost of the building rise over time, the value of your contents can be pushed up by inflation. Contents insurance is usually ‘new for old’ cover, so you need to make sure you increase the sum insured in line with inflation.
• Major purchases: Have you bought new furniture or other possessions since you took out insurance? If you have, you should tell your insurer to increase your sum insured for contents, or you could be underinsured.

How does underinsurance work in practice?

Picture this: your home would cost £300,000 to rebuild, but your buildings sum insured is only £200,000. You’re underinsured by £100,000. In the event of a total loss claim, you’d face a hefty shortfall that comes straight out of your own pocket.

The risk of underinsurance isn’t just about having some cover versus no cover, it’s about having enough cover when you need it most. And with rising costs across building materials, labour, and professional fees, what seemed like adequate cover last year might leave you short-changed today.

How to tell if your home is underinsured?

There are several tools and methods you can use to help check the accuracy of the value of your home and contents.

You can estimate the rebuild value when you get buildings insurance quotes from different providers. Most insurers will provide an estimated figure as part of the quote process. It’s a good starting point, although you might want to choose a higher rebuild value if your home has unusual construction. You can get a more accurate figure from a surveyor if that’s the case.

You can also use the Building Cost Information Service calculator. It’s free to use although you do need to register. It can help you to get a rough idea of your home’s rebuild cost so you don’t end up paying any shortfall.

For contents, you’ll need to go through each room systematically and add up the replacement cost of everything you own. Many insurance comparison sites offer contents calculators to help you work through this process methodically and make sure you don’t forget anything important.

What happens when you’re underinsured?

When disaster strikes, underinsurance can turn a bad situation into a financial nightmare.

The average clause trap

Many insurers include an average clause in their policies. This means if you’re underinsured, they’ll reduce your payout proportionally, even for smaller claims.

Here’s how this works in practice: Your kitchen floods and needs £15,000 worth of repairs. Sounds straightforward, right? But because your overall buildings cover is significantly too low, your insurer applies the average clause. Instead of the full £15,000, you receive just £10,000, leaving you £5,000 out of pocket.

That’s £5,000 for something that should have been fully covered. Ouch.

How can you avoid underinsurance?

Get a proper rebuild cost assessment

Don’t guess, get expert help. A professional valuation will give you an accurate rebuild cost based on current building materials and labour costs. The Royal Institution of Chartered Surveyors (RICS) provides building cost information that many professionals use as a benchmark.

Consider factors like:

• Size and type of construction
• Quality of fixtures and fittings
• Local building costs in your area
• Any unique architectural features

Review regularly

Your rebuild cost isn’t a set-it-and-forget-it figure. Review your sum insured annually, especially given how quickly building costs can rise. Many insurers offer automatic inflation adjustments, but these might not keep pace with actual cost increases in your area.

Don’t confuse market value with rebuild cost

Your property’s market value (what you’d get if you sold it), is completely different from its replacement value. Market value includes the land, location factors, and current property market conditions. Rebuild cost is purely about the expense of reconstructing your home from scratch.

Consider guaranteed replacement cost policies

Some insurers offer guaranteed replacement cost cover, which removes the guesswork entirely. Instead of setting a fixed sum insured, they guarantee to rebuild your property regardless of the final cost. These policies typically cost more, but they eliminate the risk of underinsurance altogether.

How do you get the right level of insurance?

Here’s what you need to know to make sure your home and belongings are covered with the right level of buildings and contents insurance.

Building insurance

Your mortgage lender will expect you to have building insurance that covers the cost of rebuilding your home from scratch.

Remember, the full rebuild cost of your home could be more than its current market value. That’s because it includes the cost of all the labour and materials needed to clear and rebuild your property.

Before doing any renovations, always check your policy wording to find out if you need to tell your insurer first.

Contents insurance

Contents insurance covers the things you’d take with you if you moved home, like:

• Clothing
• Furniture that isn’t a permanent fixture or fitting
• Electronics
• Curtains and carpets
• Ornaments and trinkets
• Artwork

Certain items, like jewellery and expensive gadgets, can have claim limits. You can name these items specifically on your policy to cover them for their full value. And if you’ve bought something new, don’t forget to update your policy to include it.

Do different properties have different underinsurance risks?

Some properties face much higher underinsurance risks than others due to their unique features or circumstances.

Period properties and unique homes

If you own a period property or something with unique features, standard rebuild calculations might not apply. Historic building materials, specialist craftsmen, and compliance with conservation requirements can significantly increase costs.

Commercial property and business insurance

Business owners face additional complications. Not only do you need adequate property insurance for your premises, but business interruption cover must reflect your actual turnover and the time it would take to get back up and running.

Calculate your gross profit accurately and consider how supply chain disruptions might extend your business interruption period. What seems like a three-month closure could easily stretch to six months if specialist equipment or materials are needed.

High-value items and contents

Don’t forget about contents insurance. That expensive sound system or jewellery collection might push your contents sum insured higher than you think. High-value items often need separate cover or higher policy limits.

Should you work with professionals to get your cover right?

Getting expert help can save you from costly mistakes and ensure your coverage actually matches your needs.

Insurance brokers and advisers

An experienced insurance broker can help you navigate the complexities of getting your sums right. They understand how different insurers calculate payouts and can recommend appropriate level of cover for your specific circumstances.

Surveyors and valuers

For complex or high-value properties, instructing a chartered surveyor to carry out a reinstatement cost assessment is money well spent. They’ll provide a detailed report that you can use to set appropriate sum insured levels.

Regular reviews with professionals

The Financial Conduct Authority expects insurers to help customers understand their cover, but ultimately it’s your responsibility to ensure you have adequate insurance coverage. Regular professional reviews help ensure your protection keeps pace with changing circumstances.

Bottom line

Underinsurance isn’t about penny-pinching on premiums, it’s about making sure you’re actually protected when disaster strikes. Get a proper valuation, review it regularly, and don’t let the gap between what you’re covered for and what things actually cost catch you off guard. A few extra quid on your premium is nothing compared to being thousands out of pocket when you need your insurance most.

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