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Underinsurance warning! Policyholders urged to review their home cover to avoid inadvertently underinsuring

04 May 2016
  • Less than half (48%) of home contents policies automatically increase the sum insured each year in line with the Retail Prices Index (or other suitable index);
  • 3% of home contents policies have an unlimited sum insured
  • A quarter of homeowners have been with the same insurer for 5 years or more while 13% haven’t changed insurer for 10 years or over
  • Gocompare.com Home Insurance has produced an online Contents Value Calculator to help people more accurately value their home contents.

Gocompare.com Home Insurance is urging people to regularly review the value of their home contents to avoid the risk of underinsurance. Householders underestimating the replacement cost of their home’s contents, or deliberately undervaluing them to save money, could be thousands of pounds out of pocket if they need to make a claim - making an already stressful experience much worse.     

The warning comes as new research* reveals that only 48% of home contents policies automatically index-link premiums. While index-linking helps to keep the sum insured in line with increases in prices, it does not take into account any increases in value as a result of new purchases, gifts or inheritances. 

Research** commissioned by Gocompare.com Home Insurance also found that a quarter of homeowners have been with the same insurer for 5 years or more while 13% haven’t changed insurer for 10 years or over. If these policyholders haven’t reviewed their insurance needs and kept the value of their home’s contents up-to-date, they could find that they are inadvertently underinsured.

Ben Wilson from Gocompare.com Home Insurance commented, “It’s surprising how quickly our belongings and household contents change over time. And, it’s all too easy to fall short on home insurance cover, particularly if you haven’t reviewed your arrangements for 5 to 10 years.

“Over the last decade or so, the nature and value of our home’s contents has changed. One major change has been in the amount and value of technology and entertainment systems we now have in our homes – from computers, ipads and laptops to home theatre systems and online gaming systems. Now, instead of just one telly in the corner of the lounge, it’s not unusual for homes to have a number of TV sets throughout the house.

“The technology used in kitchens has also changed dramatically following the availability of high tech appliances originally designed for commercial kitchens such as steaming ovens, pizza ovens, coffee machines and boiling water taps. In some homes, even basic cookers and fridges have been replaced by expensive Range cookers and American-style fridge-freezers.

“As our belongings evolve over time it’s hard to assess their collective value. And, I think most of us would be surprised by the cumulative value of our stuff. To avoid underinsuring your home’s contents, it’s essential that you calculate the current value of replacing your possessions to provide your insurer with a realistic sum insured. Our online Contents Value Calculator is designed to help you do this. Systematically, room by room, from floor to ceiling, it prompts you to think about your belongings - including commonly overlooked items like curtains and fittings, carpets and items stowed away in the attic or garden shed. The calculator then does the maths for you. It’s also important to review and recalculate your cover each year when your policy comes up for review or after making a major purchase.”

Ben Wilson continued, “In order to save some money on your home insurance don’t be tempted to underinsure your contents. What many people perhaps don’t realise is that if their insurer thinks that they are underinsured - it will pay only the corresponding percentage of a claim. This could result in a shortfall of thousands of pounds. A much better way to get a better deal and save money on your premiums is to shop around using a comparison website like Gocompare.com.” 

Underinsurance – the risks

If your insurance does not accurately reflect the true value of your home contents, any claim settlement may be insufficient to cover your losses. This is because insurers can reduce a pay-out by the level of the underinsurance. Known as the average clause, this can reduce the value of a claim by thousands of pounds.

If a claim is settled on an average basis, the claim pay-out is calculated using the following formula: the sum insured, divided by the true value at risk, multiplied by the loss.

For example, a home’s contents is insured for £30,000, but the true value is £60,000 – so the policy only covers 50% of the actual value. A house fire causes £10,000 worth of damage to the contents. As a result of the underinsurance, the insurer applies the average calculation, reducing the value of the claim proportionately from £10,000 to £5,000 – leaving the policyholder £5,000 out of pocket.

In certain cases insurers can use underinsurance as grounds to void a policy completely***.

Valuing your home’s contents

When buying cover for home contents, insurers ask for the value of the possessions you wish to insure. Typically home contents are insured on a ‘new for old’ basis, meaning that items lost or damaged beyond repair as a result of an insured event, will be replaced with new items of the same make or specification (or equivalent monetary value). Therefore, the valuation you give for insurance purposes should reflect the current replacement value of your home’s contents. The only exception is for clothing and linen where the value is reduced to reflect wear and tear.     

As a rule of thumb, anything which you would usually take with you when you move home is considered to be ‘contents’. Typically, this can include:

  • Household items (e.g. freestanding kitchen appliances, white goods, TVs and other electronic items, glassware, crockery and cutlery);
  • Items kept in garden/outbuildings (e.g. garden furniture, cycles, outdoor toys, garden and DIY tools);
  • Furniture and furnishings (e.g. carpets, curtains, beds, bedding, sofas, cushions, tables, chairs, cupboards, book cases, desks, ornaments, lighting);
  • Valuables (e.g. jewellery, watches, works of art, cameras);
  • Personal belongings (e.g. clothes, shoes, accessories, DVDs, games consoles and games, CDs and records);
  • Money (e.g. cash, cheques, premium bonds, travel tickets);
  • Sports and leisure equipment (e.g. weights, running machine, musical instruments, books and toys);
  • Floor coverings (e.g. carpets and rugs);
  • Digital downloads (e.g. music, films, books);
  • Contents of the loft (e.g. old toys, seasonal decorations).

Insurers apply different single item limits for items and valuables, this is the maximum amount an insurer will pay for an item and may differ between item types or insurer. This will be shown either as a monetary limit or a percentage of the overall sum insured.   You should make sure that cover levels are sufficient to cover your belongings, if not contact your insurer to arrange increased cover. 

If you add to your possessions – perhaps after redecorating the lounge and buying a new sofa, or following a wedding or a new addition to your family - you should ask your insurer to increase the sum insured to reflect the increased value of your home contents.

Gocompare.com has produced a guide how to avoid under-insuring your home .

- ENDS -

Notes to editors:

*Source: Defaqto Matrix of 434 home contents policies - instant and unbiased market and competitor intelligence, from independent financial researcher Defaqto (29 April 2016). Percentages are rounded up to the nearest whole number.

**On 23 March 2016, Bilendi conducted an online survey among 2,000 randomly selected British adults who are Maximiles UK panelists. The margin of error-which measures sampling variability-is +/- 2.2%. The results have been statistically weighted according to the most current education, age, gender and regional data to ensure samples representative of the entire adult population of United Kingdom. Discrepancies in or between totals are due to rounding.

***Source: http://www.financial-ombudsman.org.uk/publications/technical_notes/under-insurance-household.html