What is Underinsurance & How Does it Affect Me?

We talk a lot about underinsurance. With some help, it is a potentially costly problem that can be avoided.

 

Underinsurance occurs when someone buys insurance coverage, but the cover purchased is insufficient to meet its requirements in the event of a loss. This can leave you with large, unexpected bills, impacting your ability to recover from a loss.

 

You might not have enough insurance to cover a loss for many reasons, including miscalculating cover, out-of-date valuations, inflation, and changes to the cost of materials. Recent stats reveal that 83% of UK properties were underinsured.

 

The financial impact of underinsurance can pose a severe problem for policyholders. Underinsurance is most evident when there is a claim, and the insurance coverage is insufficient to rebuild the property. In situations like this, most insurance policies have a clause called the “Average condition,” which adjusts the claim settlement by the amount of underinsurance.

 

Here is how average works in practice. Suppose the reinstatement cost of a property is £2,000,000, but it is only insured for £1,000,000 when a total loss occurs. In that case, the insurer will pay only £500,000, leaving the policyholder to cover the remaining cost.

 

Similarly, any partial loss will be reduced in the same proportion, considering any excess that applies.

 

If you have any questions about underinsurance or would like a confidential chat, contact us at 01843 293614.