The Danger of Underinsuring Your Property

A common issue we frequently encounter is policyholders underinsuring their home/property. This may seem a good idea at the time as the premium will be less expensive but there are serious implications in doing this. Why does one insure their property? They do so to ensure that should they be unfortunate enough to suffer a loss, their insurance policy will provide the finance they need to reinstate the property.

What Happens If I Underinsure?

At the time of a claim the insurance company’s loss adjuster will check to see if a policyholder has adequately insured their property for the rebuild value. Numerous factors affect this calculation – location of property, internal floor area, number of bedrooms, special finishes – to name but a few.

If the loss adjuster determines that the property is underinsured, they generally apply what’s called the ‘average clause’.

What is the Average Clause?

This is a clause in your insurance policy which allows the insurer, if the property is not adequately insured for the rebuild value or within 15% of the rebuild value, to only pay the proportion that the sum insured bears to the rebuild value of the property.

Example of how the Average Clause works:

If the ‘Value at Risk’ of a property is €400,000 and a policyholder has a Sum Insured of only €300,000, then the average clause will apply at the time of a claim. In this instance the insurance company’s loss adjuster will advise that you are underinsured by €100,000 and that YOU must bear a proportion of the claim.

Let’s take a further look at the example above and consider how this works in the event of a fire to the property!

If a contractor’s quote states that it will cost you €150,000 to reinstate your property, then you will need to make a claim of €150,000. As you are underinsured by 25% the insurer will then only cover 75% of the claim as this is all they are liable for. As a result, you, the policyholder, are liable for the remaining 25%. In this instance the insurer will only pay €112,500 of your €150,000 claim leaving you to pay the remaining €37,500 of the reinstatement costs.

Underinsurance – Clever Move or Not?

I hope the example above shows how saving a few euro at the inception of your insurance policy can cost you dearly at a time when you are at your most vulnerable. After all the purpose of the policy is to help you at this time. Bear in mind that ‘cutting corners’ can be counter productive and very costly in the end.