Underinsurance, Average and The Importance of Sums Insured

An article for broker and insurance intermediaries. 

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We are currently seeing an increase in the number of claim settlements affected by underinsurance, partly due to the unprecedented ongoing market conditions relating to the cost and availability of building materials (for example the cost of timber has risen 40% over the last 12 months so the construction and materials required to rebuild a property needs to be considered).

Case Study

Property insured for £290,700 but correct building sum insured is £2,140,000 so only 13.58% adequately insured at the time of loss. Property is a 5 bed, 1800, listed structure. 

Claim value was £17,686 but due to under insurance claim settled at only £2,419.

Question: Do you review the sums insureds on behalf of your client at new business and renewal? If not, why not?

As the broker or insurance intermediary it is your responsibility to review all information provided by the client to provide them with the most suitable cover and thus ensuring that they are fully compensated should a loss occur.

Whilst ultimately it is the client’s responsibility to ensure that their sum(s) insured are adequate as their insurance expert this one opportunity for you to provide a great service to your client by advising them of the importance of declaring the correct sums insured.   

Buildings - Key Reminders

  • Building sum insured – Needs to be the full value cost of rebuilding your property by a professional third-party contractor. This includes rebuilding expenses such as architects & surveyor fees, clearing the site of debris, complying with local building regulations etc. 
  • Outbuildings, Walls, Driveways, Paths etc. also need to be included in the building sum insured.
  • The rebuild cost is not the same as the market value.

How to Calculate an Accurate Rebuild Cost?

The most accurate way to calculate the rebuild cost is to have a survey carried out by a chartered surveyor. 

Clients in the UK can find a surveyor in their local area by visiting https://www.ricsfirms.com/

Alternatively, the client can register for the BCIS (Building Cost Information Service) calculator which is provided by RICS (Royal Institute of Chartered Surveyors) but this will require them to enter certain data regarding their property such as square footage. Care is therefore required to ensure an accurate calculation is provided.

NOTE: The calculator is also only suitable for properties of a standard nature. If there are any unusual features, construction or the property is listed we advised on a structural survey being carried out.

The calculator will also allow a check of rebuild cost up to four times in any one 12 months period.

https://abi.bcis.co.uk/calculator/calculator.aspx

Further information can also be found on the ABI (Association of British Insurers) website: https://www.abi.org.uk/products-and-issues/choosing-the-right-insurance/home-insurance/buildings-insurance/calculating-your-rebuild-cost/

For the Republic of Ireland information on calculating rebuild cost can be found on the Society of Chartered Surveyors Ireland website: https://scsi.ie/consumer/build/house-rebuild-calculator/

NOTE: If there are any unusual features, construction or the property is listed we advised on a structural survey being carried out.

Contents – Key Reminders

  • For general contents and personal possessions, the figure must be the cost to replace as new.
  • For valuables the figure must reflect the current market value.

Items to Consider

As a general rule of thumb if you were to turn the property upside down anything that isn’t fixed would be classed as contents. Below we have listed the type of items that your client needs to consider when calculating their contents sum insured.

 Hallway

  • Furniture, including tables and sideboards
  • Telephone
  • Artwork and antiques
  • Rugs

Lounge

  • Sofas and armchairs
  • Furniture, including cabinets, tables, sideboards and bookcases
  • Lamps
  • Artwork and antiques
  • Electronics, such as TVs, tablets, laptops and radios
  • Books
  • CDs and DVDs

Kitchen

  • Cooking equipment, including the stove, oven, kettle, toaster and microwave
  • Fridge and freezer
  • Washing machine
  • Contents of cupboards and freezer
  • Tumble dryer
  • Dishwasher
  • Pots and pans

Dining room

  • Furniture, including tables and chairs, and sideboards
  • Artwork and antiques
  • Lamps
  • Crockery and cutlery

Bedroom(s)

  • Furniture, including beds, wardrobes, drawers and bedside cabinets
  • Soft furnishings and bed linen
  • Lamps
  • Jewellery
  • Clothes and shoes
  • Cosmetics and toiletries

Garden shed/garage

  • Garden furniture
  • BBQs
  • Tools
  • Electricals, including lawnmowers and hedge trimmers
  • Bicycles

For high value items such as jewellery, antiques etc. your client should get these professionally valued on a regular basis to ensure that they are adequately insured in the event of a loss. 

Buildings and Contents – Key Reminders

  • If, at the time of any loss or damage, the sum insured is not enough we will proportionally reduce the amount of any claim payment made by the percentage of under payment of premium which has arisen as a result of the shortfall in the sum insured.
  • At renewal we will automatically increase the buildings and contents sum(s) insured in accordance with the index we have set. It is however dependent on the sum(s) insured disclosed to us at the start of the policy being correct.
  • Policyholders have an ongoing duty to ensure that their sums insured represent the full value of the property insured. As their expert insurance advisor, you should continue to remind them of this.
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