Don't make the mistake of under-insuring your home and contents, or you might have problems if you need to make a claim.
When taking out home insurance, you may be tempted to state a lower rebuild cost for your house or to underestimate the replacement cost of your home’s contents in order to to get a cheaper quote.
You may think that you’re saving money by under-insuring, but if you need to make a claim it could end up costing you dearly.
When arranging a policy, your insurer will ask for the value of the buildings and/or contents you want to insure.
If you fail to provide accurate figures, you may find yourself in a difficult position if you ever need to claim.
If the insurer decides that the amount insured isn’t sufficient to cover what was in your home, it may decide to ‘apply average’ to a claim.
Applying average means that where the sum insured isn’t sufficient, the insurer can reduce its liability by invoking an ‘average clause’, which is contained in many home insurance policies.
If the insurer applies average, the sum to be paid out is calculated using the following formula:
The sum insured, divided by the true value at risk, multiplied by the loss = the sum paid out
As a case study, a policyholder insures contents for £20,000 when the actual value of the contents is £40,000.
A theft results in £10,000 worth of property being stolen from the policyholder, but when they approach their insurer the payout is worked out as:
£20,000/£40,000 x £10,000 = £5,000
This means the policyholder has had £10,000 worth of property stolen, but the insurer will only pay out £5,000. This is despite the policyholder taking out insurance to cover £20,000-worth of property.
“Many people believe that telling their insurer a lower contents value will get them a cheaper home insurance premium, but this isn’t always the case,” said Gocompare.com's Ben Wilson.
“The average clause isn’t strictly fair to consumers, but most insurers use it to encourage people to take out a sufficient level of cover.”
Sometimes insurers may even apply average when there isn’t a clause for it contained in the policy.
Make sure you check the terms and conditions of your policy thoroughly when taking it out - if you need to claim, being knowledgeable about your policy wording will help to pre-empt any claim disputes.
The insurer will rely on you to give it a clear picture of the rebuild cost and content value of your home, so it’s important to know how to work these figures out.
"Overvaluing the rebuild cost of your property or your contents cover could mean that you're paying more money than you should be for you home insurance," said Wilson.
"Your insurer will only ever pay the eventual cost, regardless of the value stated on your policy.”
Remember that your home’s contents change regularly, and if you buy any particularly expensive items - like gadgets or jewellery - you’ll need to tell your insurer so your cover can be increased.
Blanket coverage provides you with a buffer in the event that your contents value increases
Ben Wilson, Gocompare.com
“We’re a society of hoarders - we buy new gadgets and fail to throw things away, accumulating more and more contents in our homes,” says Wilson.
“Adding up your contents is a boring job, but it could save you money in the future.
“If you buy a new gadget or receive gifts for a birthday, wedding or at Christmas, it’s important to let your insurer know so they can increase the level of your cover.”
Some insurers do provide an increased level of cover during special occasions such as a wedding or Christmas, so it’s worth checking your policy for this.
“The items that people carry around in their bags are usually what get forgotten when calculating contents, but if your policy does offer cover for things like smartphones and tablets then it’s important to list them on your policy,” said Wilson.
Insurers usually set a maximum limit for individual items, likely to be in the region of £1,500, so if you have items worth more than this they’ll need to be listed separately on your policy.
An alternative to telling your insurer the exact value of your contents is to take out blanket coverage, which offers cover up to a certain amount.
For example you may own contents valued at £25,000, but your insurer will cover you up to £40,000.
“Blanket coverage provides you with a buffer in the event that your contents value increases, and means you don’t have to remember to ring your insurer to increase your cover,” says Wilson.
“This cover isn’t necessarily more expensive than taking out lower contents insurance, and offers consumers priceless peace of mind.”
There are two main ways to calculate the rebuild cost of your home.
You can consult your mortgage valuation survey, if you had one done when you bought your home, or you can use a rebuild calculator.
If you enter Gocompare.com's quote process, you'll see that an estimated rebuild calculator is available if needed.
It’s important to note that your home’s rebuild cost can be very different to its market value or selling price. Both will fluctuate over time, but rebuild cost tends to remain steadier for longer.
If you extend your property, make sure you tell your insurer and get your cover reassessed - if your property is damaged by flooding or fire and your policy provider wasn’t aware of changes, it may void your policy.
You need to avoid under-insuring, but you should also steer clear of doubling up on cover.
You might think this will give you an extra level of insurance, but it doesn’t quite work like that.
Before adding items to your home insurance, make sure they’re not already protected under another product with insurance included, like a paid-for bank account or credit card.
Doubling up on insurance is a problem for several reasons.
Firstly, it makes it complicated if you need to claim as each insurer may believe the other should pay out.
Also, it could make your insurance cost more in the future because it could be deemed that you've made claims on multiple policies, even though it was only related to one incident.