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Under-Insurance Explained
Liberty Insurance | Under-Insurance Explained

At Liberty Insurance we know how much life has changed in recent years. And many of us have used this time to make changes at home too! 

Recent Liberty research* found that 40% of Irish adults have repurposed a space in their home since the pandemic began, while 38% have renovated rooms.

These investments, if they increase the rebuild or reinstatement cost of the home, can have significant insurance implications. With this in mind, it’s a good idea to review the cost to rebuild your property that you have stated in your current home insurance policy.
 
That’s why, in this blog post, we explain how this situation could arise, why it is important to get your insurance cover right and how to ensure you’re fully protected. 

What is under-insurance?

Under-insurance can have very significant consequences for homeowners. It refers to a scenario whereby a property is insured for less than the value it would cost to rebuild or reinstate it. 

What happens if you go to make a claim and your house is under-insured? 

In event of a claim, your home insurance policy will cover the full cost required to reinstate your property to its pre-accident condition. However, this may not be the case if you are under-insured. 

If you are under-insured, this means you have underestimated the cost to rebuild or reinstate your property, you may find that the current insurance cover you have purchased only partly covers that cost. 

To take an example, if your policy is based on a rebuild cost of €300,000, that is what you are insured for. Should the rebuild cost turn out to be €400,000, you are still only entitled to €300,000 from your insurer. This also applies to partial claims, as you have only purchased insurance for three-quarters of your property.

In this case, if you suffered damage or loss of part of your property with an actual reinstatement cost of €80,000, you are only entitled to three-quarters of this amount (€60,000) as you have only covered three-quarters of your property as a result of being under-insured.

How could you be under-insured?

There are numerous reasons why you could end up under-insured, however the most common scenarios are as follows:

  1. Home improvement – if you made changes to your home, be that a kitchen extension, attic conversion or even new windows, and neglected to update your insurer. Such changes could alter your property rebuild amount.
     
  2. Rolling renewals – if you rolled forward your policy information at the point of renewal, including rebuild or replacement costs, you may find that their previously accurate policy information is now out of date and fails to reflect year-on-year inflation. This scenario has become increasingly common in the last 18 months, due to rapidly rising building material and labour costs.
     
  3. Unwitting underestimation – if you inaccurately estimated the cost to rebuild your house when you initially purchased your policy.

What is the difference between the rebuild cost and market cost of your house?

Market value is the price your home could sell for on the market. It reflects not only construction costs, but the cost of the land, the demand for houses and the location of the property.

Rebuild cost is the cost to replace or reinstate your house to an equivalent standard, using equivalent materials and equipment, and does not include the cost of the land.

Rebuild cost is what is important from an insurance perspective. It may be higher or lower than the market value, but the cost to restore a property - not the market value that the house could sell for - is what customers should insure.

How to ensure you’re not under-insured?

At Liberty, we want you to have the appropriate level of cover so that in the unfortunate event you need to make a claim, you have the peace of mind that comes with knowing you’re fully covered.

If you'd like to get an accurate estimate of your rebuild costs, check the Society of Chartered Surveyors’ House Rebuild Calculator here.

If you're worried you may be under-insured, check your current home insurance policy to ensure that the estimate you entered when purchasing/renewing the policy is accurate and up to date.

As always, Liberty’s Customer Service team are always here to help. 

*Research commissioned by Liberty Insurance and carried out by RED C as part of an online survey. 520 adults in Ireland amongst a nationally representative sample of car and/or home insurance owners aged 17-75 were interviewed in March and April 2021. Quotas are set on gender, age, social class, and region.