Underinsurance can cause claim settlements to be proportionally reduced, resulting in customers not receiving full indemnity following a loss. Inadequate property settlements can then go on to further impact a business, such as its ability to continue trading.
Policyholder insures property for £750,000. Following claim, the actual reinstatement is £1,000,000, meaning the Policyholder is underinsured by 25%.
Costs of repairs are £500,000. Insurers contribute £375,000, meaning there is a £125,000 shortfall (25%) for the Policyholder.
Numerous factors are thought to be causing such high levels of underinsurance – in particular, a lack of understanding of how to calculate reinstatement values along with infrequent professional valuations.
Causes of underinsurance:
- Misunderstanding what information is required – (e.g. market value vs. rebuild cost, which can differ significantly)
- Out-of-date valuations, not conducting regular reviews and not responding to changes (e.g. not increasing the sum insured after an extension/renovation on the property)
- Insufficient indemnity period chosen (e.g. covering 12 months’ loss of rent for a property which may take longer to repair/rebuild)
- Not considering demolition and protection costs
- Not considering professional and administration fees (e.g. architect costs, planning application fees, etc.)
- Not considering listed and period features – specialist trades and materials may be required which can inflate the rebuild cost
- Not considering external works – details such as boundary walls, driveways, lighting, drainage and landscaping should be included in the sum insured
- Not considering contamination costs – if a property has a contaminant (e.g. asbestos), specialist removal and disposal costs should be taken into account
- Not considering regional differences – prices of labour and materials can vary significantly across the UK
With the correct support and guidance, the risk of underinsurance can be alleviated. Contact us now on 01924 871111 to discuss, and visit www.wtj.co.uk/rebuild for further information.
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