Underinsurance

As a result of rising rebuilding costs, many home insurance holders in Ireland are unknowingly underinsured, leaving themselves vulnerable to significant financial loss in the event of a claim.

Many policy holders don’t realise they’re underinsured until it’s too late. So, to avoid an underinsured claim, it’s important to understand the meaning of underinsurance, how it’s calculated and how to avoid it.

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What is Underinsurance? 

Underinsurance occurs when you insure your home for less than it is actually worth. This can happen when:

  •  You specify a buildings sums insured that is less than the total rebuild cost of your home
  • You specify a contents sums insured that is less than the total amount it would cost to replace all the items in your home.

Due to inflation, the rebuild and the total cost of your contents is changing all the time. It is important to review the value of your contents and the rebuild cost of your home regularly to ensure that you are considering the effects of inflation.

What happens if you are underinsured?

Being underinsured means that in the event of a claim, your insurance payout may not be sufficient to cover the full extent of your loss. This shortfall can result in out-of-pocket expenses that could strain your financial resources. For homeowners, it could mean not having enough funds to rebuild or repair their property.

 

The Principle of Average

If you are underinsured it can significantly affect both the premium that you are paying, as well as the effectiveness of the cover you have purchased. Underinsurance can lead to:

·       A reduced/partial settlement at claims stage due to the principle of average

·       Insufficient financial compensation in the event of a total loss

The principle of average applies when you are underinsured. Your premium is based on the sums insured you have selected. If your sums insured is lower than the true value, your premium wouldn’t be reflective of the risk. This could result in your claim payment being reduced in proportion to the degree of underinsurance.

For example, if the total rebuild cost of your home is €1 million, and you have specified a buildings sums insured of €800,000, you are underinsured. Any claim you have will be reduced to 80% (800,000 / 1,000,000).

 

What about a total loss?

In the event of an incident leading to a claim that exceeds your sums insured, your payout will be limited to the sums insured which might not be enough to cover you for your full loss.

Underinsurance examples
Underinsurance examples
How can you protect yourself against underinsurance?

In order to protect yourself against underinsurance, it is important you carefully consider the sums insured you are selecting at both quote and renewal stage. You may also update your sums insured at any time. It is vitally important to ensure your sums insured adequately reflect the true rebuild cost of your buildings and the cost of replacing all of your contents at all times. Some things to protect yourself from underinsurance include:

Inflation Protection

How can you protect yourself against underinsurance?

In order to protect yourself against underinsurance, it is important you carefully consider the sums insured you are selecting at both quote and renewal stage. You may also update your sums insured at any time. It is vitally important to ensure your sums insured adequately reflect the true rebuild cost of your buildings and the cost of replacing all of your contents at all times. Some things to protect yourself from underinsurance include:

Inflation Protection