The home insurance clause that could prove costly
When was the last time you considered how much it would cost to replace the entire contents of your home? Are you insured for their full replacement value? How many years is it since you had an assessment of the rebuild cost of your property? These are important questions to consider because the implications of under-insurance can be severe, even if you are only claiming for a fraction of your overall cover.
Although policyholders often don’t realise it, many home insurance policies include under-insurance clauses which can result in the insurer making a proportionate reduction to any claim if your overall sum insured is found to be less than it should be. In extreme cases, this could result in a claim being declined altogether.
Under-insurance may affect a large number of home insurance policyholders in the UK and it is easy to become a victim, even simply down to the passage of time. The accumulation of possessions, the increasing value of jewellery or rising building costs can easily slip by unnoticed. Unfortunately when it comes to the assessment of a claim, there doesn’t tend to be a distinction between an honest mistake and an intentional attempt to save on premium; if you are under-insured, you are under-insured and any relevant clauses will typically be applied.
How could this affect you?
Assuming that the insurer agrees to cover the claim, it will calculate the percentage that your sum insured represents of the correct level of cover and apply this to the value of your claim. If for example, your contents are insured for a sum of £75,000 but a loss adjuster overseeing a claim reports to the insurer that the realistic replacement value of your contents is at least £100,000, then you are considered to be under-insured by 25%. In the case of a loss valued at £10,000, the existence of an under-insurance clause is likely to lead to the claim being restricted to £7,500. In the event of a total loss, then the 25% reduction would be applied to your cover of £75,000 resulting in a claim value of £56,250. This would represent a loss of over £40,000 compared to the true value of your contents.
The implications could be much worse if there is a shortfall in buildings insurance cover. In the case of a total loss due to fire, the impact of a reduction in the value of a claim due to under-insurance could be catastrophic resulting in you having to raise a significant sum in order to rebuild your home or forcing you to settle for an inferior replacement with serious knock on effects to future value.
How do you safeguard yourself against under-insurance?
Traditionally the answer has been to regularly check that your sums insured are sufficient to be able to rebuild your home and replace all of your possessions, even those items you wouldn’t necessarily claim for. In practical terms this can be very challenging and potentially expensive especially if you resort to a regular professional appraisal.
A simpler and more cost effective solution is to arrange your cover under a policy which isn’t based on specific sums insured. There are now policies available which provide an ‘unlimited’ sum insured on buildings and contents avoiding the need for you to specify the amount of cover you require. Although there will typically be inner limits for higher risk items such as jewellery, the unlimited cover provided for the buildings and contents removes the risk of under-insurance on these primary sections of the policy. This doesn’t necessarily mean additional cost as such contracts often prove to be more competitively priced than the traditional alternatives.
In response to the changing market and recognising the clear benefit of an ‘unlimited’ sum insured, MMM has introduced Houseproud, an exclusive contract for clients of MMM (GIB) Ltd, underwritten by AXA Insurance UK plc. For further details or if you would like a quotation, please ring 0345 603 2505.