Underinsurance: counting the costs of your assets
As we approach storm season and almost 12 months since Storm Ciaran struck the Channel Islands, many private clients and homeowners may face an unexpected but significant financial risk – underinsurance.
In this article we explore the risks and offer advice so policyholders are protected from weather related events and not left out of pocket should they need to make a claim.
Storms have been increasing in both frequency and intensity in recent years, attributed mainly to climate change. News reports from around the world regularly show weather-related damage, such as damaged roofs, flooded basements or devastation caused by rising sea levels. Such incidents can potentially leave homeowners with significant repair, renewal and replacement cost.
Some policyholders, who have not updated or reviewed their insurance policy, may assume that their existing cover will protect such damages. But that assumption can be costly. The issue is underinsurance, which could leave the customer substantially out of pocket.
What is underinsurance?
Underinsurance occurs when the sum insured on a customer’s policy is not sufficient to meet their needs. If the full replacement cost of the home or its contents is underestimated, there could be a shortfall between the actual cost of the rebuild and insurance on their home, which has to be borne by the policyholder.
A common cause of the gap in coverage is the failure to revalue the home or its contents over time. Rising property values and the costs of materials and labour – relevant during the current cost of living challenges – also lead to circumstances where the actual value of a home is not reflected by the current policy limits.
In addition to the initial costs associated in rebuilding a property, there are occasionally additional costs for things like temporary lodging, cleaning and personal item replacement. These are not fully covered by policies with low limits, which puts a heavy financial strain on homeowners during a stressful and challenging time.
What is the ‘average clause’?
Another factor to consider is the ‘average clause.’ This section of an insurance policy states that the policyholder must bear a proportion of any loss if assets were insured for less than their full replacement value.
For example, if a policyholder's home is insured for 70% of its genuine worth, the insurer may only reimburse 70% of any claim, even if the damage falls within the specified maximum. This may result in partial payment that is insufficient to fully repair or rebuild.
Having the right level of insurance is therefore key to ensuring policyholders are not left out of pocket if they need to claim.
How to avoid underinsurance
There are steps private clients and homeowners can take:
Reassess the value of property: policies should be reviewed with an insurer each year to ensure they accurately represent the worth of the home and contents. Coverage limits need to reflect recent changes to property, including renovations or adding an extension.
Consider the costs of rebuilding: The recent rises in the costs of living mean the reconstruction costs of a property have also likely increased, and the level of indexation applied by insurers may not always be sufficient. Policyholders are advised to speak to their insurer to confirm that the total cost of rebuilding, including material and any potential inflationary rises is reflected in their insurance.
Check for weather-specific coverage: Standard home insurance policies may not cover certain weather events, i.e. storm damage or flooding. Policyholders can discuss potential gaps in coverage with their insurer and consider adding specific clauses, including flood insurance, particularly if the property is in a high-risk area, such on the coast of one of the Islands.
Put together an inventory: This is standard planning and not specific to storm or flood damage. By producing an inventory of belongings including their value, this will assist policyholders in selecting the right level of coverage, but also speed up the claims procedure in the case of damage.
Be prepared
As storm season approaches, homeowners and private customers must be wary of the hazards associated with underinsurance. While it may be tempting to believe that a current policy offers complete coverage, the fact is that underinsurance can expose policyholders to large financial losses during a catastrophic storm.
By checking and updating the policy on a regular basis to reflect the true worth of a property and valuables, customers can be protected from the financial consequences of extreme weather and not be counting the costs of their assets.
Services offered
Insurers are generally well-versed in supporting policyholders.
Gallagher, one of the largest insurance broking groups in the world, provides a wide range of products, including a risk management service, flood inspection, reporting and surveys.
Our policies are also written on a new-for-old basis and importantly do not include the average clause.
Our team of private client specialists can help new customers and existing policyholders review contents to understand what level of cover they may require, so would suggest contacting us at the first opportunity.
Contact details
Andrew Fraiwald, Cert CII - Head of Ultra High Net Worth
Direct: +44 (0) 1534 500690 | Switchboard: +44 (0) 1534 500500
andrew_fraiwald@rossboroughgroup.co.uk
Rachel Evans, Dip CII - Client Relationship Manager – Private Clients
Authorised to provide advice on all types of General Insurance Business
direct: +44 (0) 1534 500683 | Private Client team: +44 (0) 1534 500690