Dramatic increases in building costs, materials, labour, Brexit, the war on Ukraine, and inflation? Recent times have exacerbated the situation we are in, making it more important than ever to review your building sums insured, to ensure you are adequately covered in the event of a loss.
To highlight the extent and occurrence of underinsurance at the moment, we delved into some of our own figures. Since January 2022, almost 50% of the claims we have assessed were underinsured. As a result, the insurance company deemed the property owner to have not declared the full value of risk to be insured. Therefore, the property owners were required to pay the remaining costs of the loss where necessary.
Obtaining a lower premium is often on top of the priority list when it comes to renewing your home insurance. However, attempting to reduce your premium may come at a significant cost in the event of making a claim in the future. Saving €50 on your premium now may cost you €5,000 on your claim settlement when you suffer a loss due to underinsurance!
Almost every second claim we have dealt with this year has been underinsured, don’t let it be you.
What is Underinsurance?
Underinsurance arises if your buildings and/or contents are insured for less than the amount required to rebuild, repair, or replace them as new in the event of a claim. If YOU have suffered a loss and your home is underinsured, you may not receive the required amount to rebuild, repair or replace your home.
According to the Insurance Institute of Ireland, underinsurance refers to a situation whereby a policyholder has not declared the full value of the risk to be insured. This means that, from the insurer’s perspective, an insufficient premium has been received. Therefore, in the insurance company’s eyes, YOU are not informing them of the total value of your property/contents and feel YOU have paid an incorrect premium!
In the event of making a claim, the insurance company will reduce their payment to you in line with the proportion of underinsurance.
Why Does Underinsurance Happen?
Underinsurance occurs for a number of reasons, but the primary cause is simply you are underestimating the correct value of your property and contents.
The amount you insure your home for is known as the sum insured, and you are solely responsible for setting the sum insured. Buildings insurance should be enough to rebuild your home if it were completely destroyed, and it is not the market value of your property. The market value is the amount your home is likely to sell for and takes into account the area and land your home sits on.
For example, if your home is listed and requires specialist materials and labour, the cost to rebuild your home may be significantly more than its market price depending on where you live. In contrast, during a property slump the value of your house may be well below the value at risk.
Another important detail to consider when arriving at the sum insured is the presence of any domestic outbuildings, driveways, and/or patios. For example, according to the Society of Chartered Surveyors Ireland (SCSI), the estimated rebuilding costs for a single attached garage is €19,500 and €32,500 for a double attached garage, on average. As such, these should be built into your overall sum insured to ensure you do not have to foot the remainder of the bill and end up out of pocket.
What Happens if I am Underinsured?
Your claim settlement may be subject to a reduction if your buildings or contents sums insured are less than the full rebuild, repair, or replace cost. Therefore, at the time of a claim, insurers will reduce the value of your claim settlement proportionately in line with the amount you are underinsured or apply a deduction for wear and tear.
When underinsurance exists, the condition of average applies and claim settlements are reduced (based on the percentage they are insured for), leaving the insured responsible for the remainder of the loss and covering any shortfalls. In the instance of underinsurance, you as the insured are deemed to be your own insurer for the uninsured proportion of your loss. Therefore, you are required to cover the remainder of the cost of the loss.
For example, John’s property is insured for €200,000, however the sum insured should be €400,000 based on the area of the house, contents, and driveways. As a result, John is only 50% covered. John suffers a loss due to storm damage and the insurance company deem the cost of the work required to fix the damage is €10,000. Correspondingly, the insurance company will only pay €5,000 to John as he is 50% insured, leaving him to cover the additional cost of the claim.
Remember – you will also need to pay the excess before any claim can go ahead, so the final payment from the insurer is likely to be even lower!
How Can AIA Loss Assessors Help?
We can advise on value at risk and help property owners calculate the correct sums insured on a non-standard house and all commercial property. Professional advise ensures adequate rebuilding rates are used and homeowners are covered. Content sums insured can also be subject to underinsurance and should be calculated correctly.
Call Sheila on 087 1720173 or email firstname.lastname@example.org