The cost of living is rising, and with it, the costs relating to Home Insurance. As inflation affects the price of construction materials, labour and household goods, many homeowners risk being underinsured without realising it. This guide will help you understand underinsurance and check whether your policy still provides the protection you need.
What are sums insured?
First, we need to address the phrase ‘sums insured’ and what it means.
Put simply, the sums insured by your policy represent the maximum amount your insurer will pay if you need to claim.
Sums insured are split into two main categories:
- Buildings Insurance: This sum covers the cost to rebuild your home if it is damaged or destroyed. It includes expenses like demolition, labour, materials and professional fees for architects and surveyors. The rebuild cost is often different from your home’s market value. For example, a home in a sought-after area may have a high market value, but the rebuild cost might be lower.
- Contents Insurance: This relates to the replacement of personal belongings. It includes everything you would take with you if you moved house, such as furniture, clothing and electronics. The sums insured should reflect the cost of replacing these items as new.
Providing accurate sums when arranging your policy is key to avoiding underinsurance and ensuring you have adequate protection when you need it most.
Why does underinsurance occur?
Several factors can play a part in underinsurance, including:
- Failure to update policies regularly, relying on outdated figures that no longer match current costs.
- Confusion around a property’s market value versus its rebuild cost.
- Forgetting to adjust cover after renovations or significant purchases.
- Attempting to reduce the price of insurance by providing lower sums insured when arranging a policy.
And then, of course, there’s inflation.
The impact of inflation
Inflation affects much more than just your weekly shop. The construction sector has faced sharp increases in material and labour costs in recent years. Timber, steel and concrete prices have soared, making home repairs and rebuilds more expensive. This is supported by recent data from the BCIS rebuild cost index, which reported significant growth in rebuild values. At the same time, the cost of household items like furniture and electronics continues to rise.
If your policy doesn’t account for these rising costs, you could find yourself underinsured when it matters most, which means you may not be able to claim for the full amount of the damage – or at all.
Understanding the “condition of average”
The “condition of average” is an insurance principle that applies when you are underinsured and may be found in your policy wording.
It means that if the sum insured on your policy is less than the actual value of the property or contents being covered, any claim you make may be reduced in proportion to the level of underinsurance.
For example: Your home’s rebuild cost is £200,000, but your policy only covers it for £100,000 (50% of the actual value).
If you make a claim for £50,000, the insurer may only pay £25,000 because you are underinsured by 50%.
This principle is designed to ensure fairness, as premiums are based on the level of risk being insured. However, it can leave policyholders with unexpected financial gaps during claims.
Avoiding underinsurance
There are practical ways to make sure your sums insured match your needs:
Review your policy: An annual check helps keep sums insured in line with current costs.
Consult experts: Chartered surveyors or valuation professionals can provide detailed assessments of your property and its rebuild costs.
Use accurate rebuild cost calculators: Tools like the BCIS calculator give a more precise figure for rebuild costs than a general estimate.
Seek index-linked policies: These automatically adjust sums insured to reflect inflation, keeping your cover in line with market changes (providing the initial sums insured are correct).
Value your belongings carefully: Create an inventory, including everything from furniture to smaller items like electronics or clothing. Keeping receipts for high-value items and photographing your possessions can save time and stress in the event of a claim.
Update after renovations: Any home improvement, such as a new extension or updated kitchen, should be reflected in your policy.
Ensuring your sums insured are accurate protects you from unexpected financial strain. With inflation pushing costs higher, it’s worth taking time to assess your policy and make adjustments where needed. A little preparation now could save you a lot of worry later.
If you need help arranging your Home Insurance policy, speak to a member of our broking team today. They can help you to build an accurate picture and arrange a policy that meets your needs.
Read more: Ultimate Home Insurance FAQs Guide
