Under insurance is the insufficient coverage by an insurance policy holder.
Under insurance can seem appealing as it may result in lower premiums but in the event of a claim, under insurance can result in serious financial losses to the policy holder. The amount you insure your property or possessions for is the most an insurer can pay out in the event of a claim, therefore the loss arising from a claim may far exceed any savings made in the initial premium.
According to the Association of British Insurers (ABI) latest guide on buildings and contents insurance, investigations indicates that one in five households could be under insured because they were unaware how much their home contents were worth. Under insurance can cause serious complications if you have to make an insurance claim, as your insurer may not pay out the real cost to replace lost or damaged items.
Consequences of under insurance
Application of ‘Average’ – this is a proportional reduction in settlement of a claim. For example, a property insured for £750,000 but actually costs £1,000,000 to rebuild. In this case, the property is only insured for 75% of the sum it should be. Claims will be settled on this basis – if the property suffered water damage of £10,000, the insurers would only pay a maximum of £7,500 for the loss.
Total repudiation – in cases where the under insurance is proved to be willful or deliberate, the policy may be considered ‘null and void’ and the claim may not be met at all.
To avoid under insurance
Keep your insurance up to date – it’s usually a good idea to review your buildings and contents/ business insurance cover at least once a year to make sure you don’t run into trouble in the event a claim does arise.