80% of properties in the UK are Underinsured, is yours?

New survey data from Rebuild Cost Assessment has revealed that 80% of UK properties are underinsured.  Potentially even more worrying is the fact that those properties that are underinsured are only covered for 68% of their total value.   Property insurance now affects over £340bn of UK property, leaving tens of thousands of property owners at risk of significant financial issues in the event of a claim. 

What is property underinsurance?

Property underinsurance occurs when the amount of cover provided for contents insurance, buildings insurance, and rebuild limits are lower than they should be.  For example, a property is insured for £350,000 when the actual cover required is £500,000.  Rebuild costs, in particular – the total cost of rebuilding a property should it be destroyed – are often underestimated, which can lead to disastrous consequences in the event of a claim. 

Why is property underinsurance such a problem?

Property underinsurance has been a growing problem in the UK for a number of years – it grew by 3% between 2021 and 2022 alone*.  The rising tide of underinsurance is a problem as it exposes property owners financially in the event of a claim.  Why?  Because insurers may decide to: 

A. Invoke the ‘condition of average’ clause – this often forms part of a building’s insurance policy and allows insurers to reduce the amount they pay in line with the cover that’s been paid for.  For example, an office owner has a business buildings insurance policy, and they make a claim on it following a winter storm. The repair and rebuild work totals £150,000, but because the insurer deems the property to be underinsured by 34%, they only pay £99,000, leaving the owner to find the remaining £51,000.

B. Void the policy – if the underinsurance gap is wide enough, it’s possible that an insurer could void the policy.  The Insurance Act of 2015 states that a client must give a ‘fair presentation’ of the facts, and that it is the property owner’s, not the insurer’s, duty to ensure that valuations are correct.  If they are not, they can refuse to make a payment.  While instances of policy voiding are uncommon, they are not unheard of, and the consequences could be devastating. 

How does property underinsurance occur?

There are several reasons why so many UK properties are underinsured, these include: 

1. Inaccurate valuations – many owners think their property’s insurance valuation is its market value, but that isn’t the case.  A property needs to be valued for insurance purposes based on the rebuild valuation – the amount of money it would cost to rebuild the building should it be destroyed – not what it would sell for.  Rebuild valuations consider things like demolition, the clearance of the site, the cost of surveyor’s and architect’s fees, planning, materials, and labour.  Often, this amounts to far more than the property’s market value, leaving it underinsured.
   
2. Increasing construction costs – according to the construction subcontractors’ website C-link, construction materials costs in the UK rose 46% between the start of the pandemic and July 2023.  Add to this a rise in the Consumer Prices Index, including owner occupiers’ housing costs (CIPH) of 3.9% 2023*, and it’s easy to see why rebuild valuation costs have soared.
   
3. Home/rental property contents cover levels are too low – while not as fundamental as the reinstatement issue, a shortfall in contents cover is common and can cost you dearly in the event of a claim.  Many property owners – including landlords – forget to include things like curtains, carpets, and other fittings, all of which may need replacing if there’s a problem.  While these items are relatively inexpensive when taken in isolation, when taken as a whole, they quickly mount up, especially when you factor in inflation.
   
4. Business contents cover levels are too low – not all properties are residential and most commercial contents policies are worked out on a reinstatement basis (new for old) rather than on an indemnity settlement (used/second hand) one.  When it comes to commercial properties and businesses, it’s important to make sure that your sum insured is sufficient to cover the cost of buying a new replacement rather than simply recouping what you paid for things.  Business contents routinely have their values on balance sheets, and this can lead to a shortfall in contents cover.
   
5. Business interruption indemnity periods are too short – business interruption cover – the cover that pays out for a period should you be unable to trade – is often underestimated.  Unless you happen to be in construction or have been affected by a disaster that has forced you to close in the past, it’s unlikely that you will know quite how long it will take to get your premises refurbished after a flood or fire, how long it will take for essential services to be restored or how long rebuilding your customer base will take.   While most policies have a standard business interruption period of one year, many in the insurance industry are now saying that the period should be two years.  This considers the delays disrupted supply chains, the planning process and being in the hands of third parties – such as utility companies – can bring.   

Property underinsurance: The importance of getting the right advice

The British Insurance Brokers Association has highlighted the need for more awareness of underinsurance and the need for property owners to get some impartial advice.  If you’re worried about property underinsurance, contact Jensten Insurance Brokers by calling 0808 239 3350.  Our team of insurance specialists will be happy to offer you a review of your cover.   

*Rebuild Cost Assessment figures.