The Hidden Risk of Underinsurance: Is Your Home Fully Protected?

For most people, their home and its contents are their most valuable assets. You buy home insurance for peace of mind, trusting it will protect you financially if the worst happens. However, a common and costly mistake known as underinsurance can leave you with a much smaller payout than you expect, right when you need it most.

This is a widespread issue. Recent research indicates that nearly 7 million households in the UK are underestimating the value of their home contents. This leaves a staggering £200 billion worth of possessions exposed to risk, showing just how easy it is to be caught out. Understanding this risk is the first step to ensuring your property is correctly protected.

What is Underinsurance?

Put simply, underinsurance is when your ‘sum insured’, the maximum amount your policy will pay out is less than the true cost of rebuilding your home or replacing its contents. It’s a frequent issue with home insurance because accurately estimating these costs can be difficult. If you haven’t insured your home and possessions for their full replacement value, you may not have enough cover in place, and your insurer may not pay the full amount of your claim.

How the ‘Average Clause’ Can Affect Your Claim

If your property is underinsured, your insurer will apply an ‘Average Clause’, which reduces your claim payment. There are two common methods for this calculation.

1. The Traditional Clause (Based on Value)

This is the most common method. Your payout is reduced by the same percentage that your property is underinsured.

Formula: Payout = (Sum Insured\True Value) * Claim Amount
Example: A property worth £400,000 is insured for only £200,000 (i.e., 50% of its value). On a £50,000 claim, the insurer will only pay 50%.
- Payout = (£200,000 ÷ £400,000) × £50,000 = £25,000

2. The Modified Clause (Based on Premium)

This approach reduces your payout based on the proportion of the premium you paid compared to what you should have paid for the correct cover. The outcome can be better or worse for you depending on the insurer’s pricing.

Formula: Payout = (Premium Paid\Correct Premium) * Claim Amount
Example: You paid a £400 premium for £200,000 of cover on the same £50,000 claim.
- If the correct premium for £400,000 of cover was £600, your payout is better: (£400 ÷ £600) × £50,000 = £33,333.
- If the correct premium was £900, your payout is worse: (£400 ÷ £900) × £50,000 = £22,222.

Crucially, in cases of severe underinsurance, an insurer may void the policy entirely and pay nothing, arguing it was a misrepresentation of the risk.

It’s important to note that different insurance providers may use different formulas to calculate the “Average Clause”, so checking with them beforehand will help you to ensure you accurately estimate the impact on your finances in case of a claim.

How to Avoid Being Underinsured

To protect yourself, you need to provide an accurate value for both your buildings and contents.

1. Calculating Your Buildings Rebuild Cost

This is the cost of demolishing and clearing the site, and then rebuilding your home from scratch to its current specification. This is not the same as your home’s market value. The market value includes the land, location, and local amenities, which is often much higher than the rebuild cost. Using the market value will likely mean you overpay for your insurance.

To find an accurate rebuild cost:

Use a Professional Calculator: The Building Cost Information Service (BCIS) from the Royal Institution of Chartered Surveyors (RICS) has a free online calculator for standard-build homes.
Check Your Mortgage Survey: If you have recently bought or re-mortgaged your property, the rebuild cost will be stated on the valuation survey.
Hire a Surveyor: For non-standard properties (e.g., listed buildings, homes with unique materials), it is best to get a professional surveyor to provide an accurate estimate.

2. Calculating Your Contents Value

“Contents” are generally defined as everything you would take with you if you moved house, sofas, beds clothes, kitchenware, and books, etc. It is vital not to underestimate their total value.

Go Room by Room: Walk through your entire home, including the loft, garage, and shed, and make a detailed list of your possessions. It’s easy to overlook everyday items that add up. People often forget to include the value of their full wardrobes, clothes, carpets, and even jewellery they don’t regularly wear when calculating their contents value.
Calculate on a ‘New for Old’ Basis: For most policies, you need to calculate what it would cost to replace every item with a brand-new equivalent today, not what the item is currently worth.
Don’t Forget High-Value Items: Many policies have a ‘single article limit’ (e.g., £1,500) Any individual item worth more than this, such as jewellery, art, or specialist tech, may need to be listed separately to be fully covered.

The Importance of Regular Reviews

Your insurance needs can change. It is essential to review your sums insured every year at renewal to ensure they are still accurate. You should also contact your insurer about:

Making Home Improvements: It is important to contact your insurer before you start work on an extension, a new kitchen, or a loft conversion. This is to ensure you have the appropriate cover in place during the building works, as well as to adjust your home’s rebuild cost.
Making Significant Purchases: Buying expensive furniture, art, or a new home entertainment system will increase your contents value.
Periods of High Inflation: Rising costs for building materials and labour can quickly make your existing rebuild cover inadequate.

How Can Riviera Insurance Help?

Feeling unsure about your rebuild cost or contents value? Don’t risk falling foul of the ‘Average Clause’.

It is your responsibility to provide an accurate rebuild cost and contents value. While our team cannot advise you on the specific amounts to insure, we can talk you through the process and provide quotes from our panel of providers to help you find the right level of cover.

Protect your biggest asset properly. Call us today on 01803 659 111 or fill in our contact form for expert guidance.