Underinsurance occurs when the level of insurance cover, or sum insured, is less than the value of the items or property being protected. In simpler terms, it means you don’t have enough insurance to fully cover the cost of rebuilding, replacing, or recovering your insured assets in the event of a loss.

Why does Underinsurance happen?

Underinsurance can happen for several reasons, including:
Incorrect Valuation: Not accurately assessing the value of your property, possessions, or business assets.
Inflation: Rising costs, particularly in rebuilding or replacement, may leave sums insured outdated.
Unlisted High-Value Items: Failing to account for expensive or specialised items such as jewellery, art, or electronics.

What does it mean to be underinsured in relation to rebuild costs?

If you’re underinsured, any claim you make will be reduced proportionally to the level of underinsurance. This is known as the ‘average clause.’

For example:
If your property’s rebuild value is £500,000, but your insurance only covers £250,000, then you’re underinsured by 50%. This means that if you make a claim, your insurer will only cover 50% of the claim, regardless of its size.

This can result in significant out-of-pocket expenses, ranging from thousands to even millions, depending on the extent of the loss.

Underinsurance Risks for High-Value Home Contents

Changes in value for high-end items like jewellery or watches can quickly lead to underinsurance.

To avoid this:
Use a Contents Calculator: Create a comprehensive list of all possessions, including furniture, electronics, clothing, and outdoor items.
Get Regular Valuations: Ensure jewellery, art, and other high-value items are professionally appraised and accurately covered.
Rebuild Valuation: Keep an up-to-date rebuild cost valuation for your home to ensure full protection.

We work with a number of trusted insurance valuation specialists. Please ask if you would like us to put you in touch.

Find out more about high value home insurance here.

Businesses and Underinsurance

For businesses, underinsurance is often linked to inadequate cover for gross profit and uninsured working expenses.

Ensure your sum insured for business interruption reflects accurate gross profits.

This is calculated as:
Turnover – Uninsured Working Expenses = Gross Profit

Uninsured Working Expenses: These are costs that decrease directly with turnover during a disruption, such as raw materials, packing materials, or commissions. Properly excluding these can help avoid over-insuring certain costs, while still protecting overall profitability.

Find out more about business insurance here.

Need Help?

Underinsurance has become a common issue in recent years with inflation and increased replacement costs. The accuracy of the information you provide to insurers is essential to avoid the risk of underinsurance, and our team of experts are here to help if you have questions or concerns about your insurance arrangements.

We hope this insight has provided a useful overview of underinsurance.