The Perils of Under Insurance
In these cash conscious times, it’s fairly common to look around to see where money can be saved and often home insurance, is one of those ” Luxury” items that people feel they can either do without or they can cut corners on. The problem is that Home Insurance, is not a luxury item, its a necessity for home owners and those living in rented accommodation a like. The government, in an acknowledgment of the fundamental value of insurance have afforded it a special tax rate (6%) rather than the usual 20% VAT that applies to most goods and services.
Once you’ve accepted the fact that it’s foolish to try and live without home insurance, it’s easy for the thoughts to turn to paying as little as possible for the product. Of course, phoning around can help you save money and there are plenty of tools and websites that help you to compare home insurance quotes online. These are all legitimate ways of trying to reduce your insurance costs, but there is another way, often considered by people , that could have disastrous results. Here is a typical thought ” Why should I insure my building and contents for the full value when I am only ever likely to want to claim for a small proportion of their total value, I can’t imagine my house burning down/flooding etc. Or, I only want to insure £10,000 contents because, that’s all I would want to claim for. Both seem like reasonable arguments but these “first loss” arrangements are not usually entertained by insurers who require you to insure for the full reinstatement value of your property, to take in to account the worse case scenario, ie , a total loss.
Now total losses are few and far between, but they do occur and were you unlucky enough to have one, you would probably find yourself financially crippled by the outcome if you did not have adequate home insurance protection in force. Insurers are easily capable of calculating their estimated maximum loss on most risks from statistics, but they require you to insure for the full value so as they are able to collect enough premium and secondly to ensure that you are insured correctly. Particularly with buildings insurances, any lender will require you to keep in force a policy throughout the duration of the loan for the full reinstatement value of the property, they will not allow you to insure for less and you will be in breach of mortgage conditions if you do so. The fact of the matter is, most policyholders cannot imagine serious losses occurring at their home, but the true nature of risk, is that it is mainly sudden and unforeseen, thus under insure at your peril.
In the event of a claim occurring under a policy, particularly if it is serious enough, a loss adjuster will be appointed by the insurance company and they will visit your home to check on the damages, whilst you may not realise it, at the same time, they will be making sue you have the correct sums insured. If you have not insured your home for the correct amount your insurance company are likely to reduce the amount of your partial loss claim accordingly. The amount of claim reduction ( after excess) will be in direct proportion to the amount of the under insurance, suddenly that amount saved on the home insurance premium does not look so worthwhile. Insurers call this reduction in a claim settlement ” Average”.
Not all cases of under insurance are deliberate, I was slightly under insured myself several years ago, as we had just moved in to a new home and had simply failed to keep up with the amount of new contents that was being added. Moving to a new home or the arrival of children are prime times when the value of contents can soar at a property. Each year prior to renewal, you should undertake the exercise of making sure that your sums insured are adequate. A reinstatement value for home buildings, may prove a little more tricky to obtain, there are online guides that will help you calculate your rebuilding costs, but these guides tend to only work for buildings of standard construction that are not split in to flats or listed or thatched. For everything else, they will give a reasonably accurate sum insured that can be relied on. Most mortgage lenders will mention a sum insured in a home buyers survey and providing a policy has been index linked and the property has not been modified or extended in anyway, the sum insured should remain up to date. Always check your home buildings and contents sums insured, failure to do so , could leave you with a nasty surprise in the event of a claim.