What is Property Underinsurance and the Average Clause?

property underinsurance and average clause
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Property Underinsurance and ‘The Average Clause’

The primary purpose of property insurance is to provide a safehold when you sustain a loss that you simply cannot afford.

However, at Glowsure we often see clients whose property is 70-80% underinsured. A previous client’s property was underinsured by over £1 million.

A 2019 report by rebuildcostassessment.com found that around 80% of policyholders are insured for less than their property is worth, leaving them vulnerable to significant financial strain. It is very likely that your property, too, is underinsured.

What exactly does it mean to be underinsured?

A property is underinsured if your policy is insufficient to cover the cost that may be incurred by its partial damage or full destruction.

Claire’s house cost £1 million to rebuild, but she has only insured it for £500,000. In the event of an insured disaster in which her home is destroyed, such as a fire or flood, she will only receive £500,000 from her insurer, forcing Claire to locate the remaining funds herself. Her property is underinsured by 50%, and consequently, her insurer is only obliged to pay for half of the total costs necessary for rebuilding Claire’s home.

Unless you have £500,000 lying around to spare, such a disaster could prove financially ruinous for you or your business.

This example may appear dramatic. However, despite her insurance policy covering £500,000 worth of damage, Claire might be surprised to learn that if her house were hit by a falling tree, causing damage of £200,000, her insurer is not bound to pay the full amount. This can be attributed to ‘The Average Clause’.

This is a condition in all property insurance policies which determines the amount paid out by the insurer when you make a claim. This is contingent upon the amount which your property is insured for, which is always your responsibility to identify.

A building should be insured for the amount it would cost to completely reconstruct it, and it is from this value that your insurer will calculate how much to pay when you make a claim.

Claire’s home was only insured for £500,000, while its total rebuild cost is £1m. The insurer will only pay 50% of the cost of the tree damage (£100,000), or any claims advanced by Claire, because she has only insured for half of the rebuild value of the property, and therefore only paid 50% of the premium.

For more information, watch this short and informative video provided by rebuildcostassessment.com:

Even if you’re not worried about your property being completely destroyed, if it’s underinsured, any heavy damages will be accompanied by significant financial and emotional strain. Most of us can’t afford losses of £500,000, or even £100,000, so it’s really important to insure your property for the correct value.

How Does Underinsurance Differ from Overinsurance?

James lives in an old house. Following a torrential blizzard, the roof of the house collapses, effectively destroying the property. Luckily, however, James has insured his home for £500,000, only to discover that, due to the dilapidated nature of the structure, the rebuild value is only £400,000. This is a classic example of over-insurance, which occurs when one’s insurance coverage exceeds the rebuild cost of the property. James has suffered a net loss. Even if he makes a claim, he is unlikely to retrieve the amount which he has overspent on his insurance policy.

However, when we review the policies of our clients and identify an inconsistency between the rebuild cost of their property and their coverage, they are typically paying too little insurance, rather than too much. If left unaddressed, this could leave you seriously out-of-pocket.

How Can Underinsurance Be Avoided?

Clearly, underinsurance is no laughing matter, and can be extremely burdensome if you ever need to make a claim.

The source of underinsurance can often be attributed to an incorrect valuation of a property’s rebuild cost. This is not equivalent to its market value and is best calculated by a professional.

At Glowsure, we offer all our property clients a virtual rebuild cost assessment by an external RICS-certified property assessor, and only charge for the cost price of this valuation. We want to ensure that all our clients are correctly covered, to avoid any more property owners suffering significant financial woes at the hands of the Average Clause.

In most cases, it is discovered that the client is underinsured, and therefore will have to pay an additional premium. However, this will enable them to make worry-free claims should disaster strike.

Don’t be like Claire. If you’re concerned that your property might be underinsured, or if you’d like more information, contact us today to receive expert advice on how to ensure that if you ever need to make a claim, you’ll always be paid the correct amount.

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Rebecca Haynes
Rebecca Haynes
Rebecca is the Operations Manager at Glowsure and a self confessed insurance nerd. She helps businesses and landlords to retain income and continue trading in the event of a claim.
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