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Home / Property Insurance / Home Insurance / Why Under Insuring Your Building and Contents is a False Economy

Why Under Insuring Your Building and Contents is a False Economy

In times of deep austerity, many policyholders are shopping around to try and save money on their home insurance cover. As the global cost of reinsurance is forcing home insurance premiums to rise in the UK, many previously apathetic policyholders now seeking out better deals from their existing insurer. However, insurance is something that many households cannot entirely eliminate from their household budget. For homeowners, the risk of no building insurance at all is simply too great - especially with so many people with so much mortgage debt hanging over them.

Likewise, for tenants living in rented accommodation who need contents insurance, although a minority choose to take the risk of not bothering to insure themselves - the majority will need to find adequate cover for their possessions.

So the temptation for many cash-strapped people is to find a cheaper quote by switching insurance providers. Increasingly, others choose to reduce their levels of insurance cover, in the hope of reducing their premium. This can be done quite easily with the convenience and speed of online insurance comparison tools, which allow you to adjust levels of covers and excesses. However, many policyholders choose lower cover levels to such an extent, that if an insurance claim had to be made in the future, the claim would not pay out the full replacement cost of the of lost, stolen or broken items.

A recent report by MoneySupermarket found that an astonishing 3.5 million homeowners are missing out on some form of home insurance and one third of those renting their homes have no home insurance cover whatsoever. Peter Harrison, insurance expert at MoneySupermarket, said: "The recent spate of bad weather and flooding highlights just how important it is to make sure your home is fully covered. Homeowners without adequate buildings and contents insurance are taking a huge risk by leaving their homes unprotected, and are potentially storing up a financial catastrophe in the event of a major incident which could even leave them homeless".

When people under insure their home, they can leave themselves disastrously overexposed, as they failed to understand the principles and practices insurance companies employ with regards to under insurance. The most common problem is policyholders who choose lower the contents cover levels to reduce their premium. Not all underinsurance is deliberate - as many of us don't actually know the true value of our own possessions. However, ignorance of the true value of a building and its contents is no excuse in the eyes of the insurance company - particularly in assessing the validity of a large insurance claim.

Although most combined buildings and contents policies have fixed levels of cover for contents, lower banding rates are available that can help to reduce the quote. However, insurance companies require you to insure the 'full reinstatement value', to take into account the possibility of a 'total loss' (such as your house burning down). So, the rebuilding cost is absolutely vital get correct. Insurance companies need to be able to payout out against all insurance claims. They can only achieve this by having the appropriate amount of premium stored away in secure investments or in cash. While the actual possibility of policyholders house burning down and destroying everything is statistically remote, it does happen. When it does happen, insurance companies can suffer huge losses.

For more serious claims such as a total loss, or the loss of a very high value 'single article item' (such as an item of expensive jewellery), a loss adjuster may be assigned to the claim. The claims adjuster will undertake a forensic analysis of the situation by visiting the property, asking lots of questions and may request written information from the policyholder ( such as evidence of proof of purchase, credit card statements and bank statements). One of their tasks is to assess the sums insured in the policy are correct in the first place. If you have not insured your home for the correct amount, your insurance company may reduce the amount of your partial loss claim accordingly. The amount of claim reduction ( after excess), may be in direct proportion to the amount of the under insurance. So, s suddenly that amount saved on the home insurance premium pales into insignificance as a false economy. Insurers call this reduction in a claim settlement 'average'.

To assess an accurate reinstatement value for buildings insurance, the main online insurance calculator is produced by the Association of British insurers (ABI). As a policyholder, it is your responsibility to investigate the correct 'rebuilding cost'. The rebuilding cost refers to the costs of demolishing and clearing away the existing structure, and then rebuilding it to its existing design in modern materials, using modern techniques, to a standard equal to the existing property, and in accordance with current Building Regulations and other statutory requirements.

However, if you're seeking a valuation of your holiday home or second home (which may have a non-standard construction such as a thatched roof or listed status), you may need to seek the advice of a professional surveyor or valuation agent. Lastly, is you do switch insurance providers at annual renewal time, check whether the new policy your considering is indexed linked to inflation, and make sure any recent building extensions or alterations are noted on the insurance policy (as these may alter your homes rebuilding cost).

We hope this summary helps you think about your cover levels as thoroughly as possible before asking for an insurance quote.

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