When it comes to protecting your property, insurance provides the peace of mind that when the unexpected happens, you’re financially secure. But what if the policy you thought you had covered is falling short without you noticing? Underinsurance is a growing concern, but it often slips under the radar until it’s too late.
In this article, we’ll uncover the hidden threat of underinsurance, exploring what it is, signs that you may be underinsured and share some practical steps to make sure your property is fully protected.
What is underinsurance?
In short, underinsurance is when someone has inadequate insurance cover for their needs. This means that in the event of a claim, the payout may not be enough to cover the full cost of repairing, rebuilding or replacing whatever has been lost or damaged.
It’s estimated that 9.3m households in the UK do not have any contents insurance, which means around £276bn worth of possessions are left uninsured. As a result, millions would not receive the money they need to repair or replace their possessions if they need to claim.
In this case, policyholders are left worse off financially, turning what should be a safety net into a financial burden. Understanding and addressing whether or not you are underinsured is crucial so that you know you are fully protected when it matters most.
The threat of underinsurance
If your property is not insured for its full value, insurers won’t have collected sufficient premiums to cover the actual risk. In regard to commercial property insurance, many commercial property policies include an ‘average’ clause. This clause reduces your payout proportionally to the extent of underinsurance. In the case of a total loss, the maximum you can recover is the sum insured, regardless of the property’s true value.
While a smaller claim with a reduced payout might not be catastrophic, a major loss could be devastating. Making sure that your sums insured reflect the value at risk means that there is less risk of a financial burden.
Why underinsurance shouldn’t be overlooked
Underinsurance can seem like a small oversight, but it can have a significant impact. Here’s why it’s a risk you can’t afford to ignore:
Financial loss
When something unexpected happens, being underinsured means your insurance won’t fully cover the costs of what needs to be fixed. This will leave you to make up the difference, putting strain on personal or business finances.
Business risks
For businesses, underinsurance can put a halt to operations. A reduced payout might mean insufficient funds to recover from a loss, potentially leading to downtime, lost revenue, or even closure.
Uncertainty
Dealing with major repairs or loss is already stressful, so discovering your insurance doesn’t provide the support needed can add emotional pressure.
Signs that you may be underinsured
Although underinsurance normally goes unnoticed until its too late, there are warning signs that could show your coverage isn’t sufficient:
- Outdated valuations: If you haven’t updated your home, contents, or business valuations in the past few years, your policy may not reflect current costs due to inflation or rising property values.
- Renovations and upgrades: If you have made significant changes to your property or have purchased expensive new items without telling your insurer, your policy might not account for these new additions in the event of loss or damage.
- Underestimating business assets: For businesses, not including stock, equipment, or fixtures in valuations can lead to gaps in your insurance.
- Underestimating asset values: Whether it is jewellery or paintings, it’s easy to overlook how much these things are worth or if their value has increased over time. The initial value set at the start of the policy is often different to the true value of assets, especially when policies are not reviewed.
- Relying on market value: If your property is insured for its market value rather than the cost to rebuild in the event of loss, you might not be paid out enough.
How to avoid underinsurance
1. Review and update your insurance policies
Start by reviewing your existing insurance policies. Look for limits of coverage, note any exclusions and compare these details against the current value of your assets – this will help identify any gaps in your coverage. Also think about any upgrades and changes you have made to your property.
2. Accurately value your assets
Periodically assess the current value of the assets that you have insured, as this will account for depreciation, market changes and other factors. You could assess the assets yourself or get a professional valuation. Doing this will help avoid unexpected shortfalls if you ever need to make a claim.
3. Talk to your insurance company
Once you have an idea on the cover that you need, talking with your insurer can help adjust your policy to your needs. This might result in increasing your cover or taking out more policies for areas that were underinsured or not insured at all.
How Nest GI can help
At Nest GI, we think everyone should have access to the highest quality general insurance help. That’s why we offer free, friendly and straightforward insurance advice. If you’re concerned about being underinsured, whether it be residential, commercial or landlord insurance, or you simply want some guidance on navigating your insurance cover, get in contact with us and we’d be happy to help.
