Underinsurance Explained
At Liberty Insurance, we know that life is constantly changing and that you're always looking to the future, just like us.
In recent years, many of us have made changes at home as remote work, among other factors, has become more popular. Recent Liberty research* found that 40% of Irish adults have repurposed a space in their home since 2020, 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's important to get your insurance cover right, and how to ensure you’re fully protected.
What is Underinsurance?
Underinsurance can have very significant consequences for homeowners. It refers to a scenario whereby a property and/or its contents is insured for less than the value it would cost to rebuild, reinstate, or replace them.
What's the Difference Between the Rebuild Cost and Market Cost of Your House?
Rebuild cost is the cost to replace or reinstate your house to an equivalent standard, using equivalent materials and equipment. It should include the cost of demolition and the cost to remove debris after a loss, the cost of professional fees, and the costs associated to comply with relevant building regulations. It does not include the cost of the site, however.
Rebuild cost is what's 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.
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 supply and demand for houses, and the location of the property.
Your Contents sum insured should cover the cost of repairing or replacing personal belongings and household goods in your home. This includes items such as carpets, rugs, furniture and electronics.
Important to know about Buildings sum insured:
Your property should be insured for its full rebuild cost. The rebuild cost is the cost of replacing your home and outbuildings. It should include the cost of demolition and the cost to remove debris after a loss, the cost of professional fees, and the costs associated to comply with current building regulations. The Buildings sum insured should include all items mentioned in the “Buildings” definition of the policy. It is important to note that Buildings include items such as solar panels, septic tanks, fuel tanks, terraces, patios, decked areas, driveways, footpaths, walls, fences, gates and hedges. If you wish to check any other item, please refer to your policy booklet for the full definition of the buildings.
Remember, the rebuild cost is not the same as the market value of your property.
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 supply and 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. It does not include the cost of the site. The rebuild cost is what is important from an insurance perspective.
Important to know about Contents sum insured:
Your Contents sum insured should cover the cost of repairing or replacing personal belongings and household goods in your home. This includes items such as carpets, rugs, furniture, and electronics.
A good tip is to calculate the value of your contents room by room and don’t forget to include your attic and garage contents. A contents checklist is available on here.
What Happens if You Make a Claim and Your House is Underinsured?
In the 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're underinsured.
If you are underinsured, 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.
Examples of Underinsurance
Here are two examples of underinsurance when applied to rebuild costs and contents loss.
Rebuild Costs
If a property is insured for €400,000 but the rebuild cost of the property is €500,000, then the property is underinsured by €100,000, or by 20% of the rebuild cost. This will impact any loss suffered by the policyholder.
We will use the above example to see how much this customer can claim if they suffer a €50,000 loss to their home:
Claim value €50,000
Less underinsurance (20%) €10,000
Sum due to the customer €40,000
In this example, the customer would receive €10,000 less than the cost of their loss.
Contents
The same principle applies to a claim for Contents. If a policyholder has contents insurance for €30,000 but the value of contents in the property is €50,000, then the property is 40% underinsured for contents.
If this customer has a €5,000 claim, the payment of the claim will be as follows:
Claim value €5,000
Less underinsurance (40%) €2,000
Sum due to the customer €3,000
In this case, the customer would receive €2,000 less than the cost of their loss.
How Could You Be Underinsured?
There are numerous reasons why you could end up underinsured. The most common scenarios are as follows:
- 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.
- 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 is common as building material and labour costs often increase.
- Accidental underestimation: If you inaccurately estimated the cost to rebuild your house when you initially purchased your policy.
How Liberty Can Help
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.
And if you're worried that you may be underinsured, or if you wish to update your policy, our Customer Service team is always here to help on 1800 89 18 90.
*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.