Underinsurance explained

Essentially, underinsurance is when you insure your home and contents for less than the amount it will cost to rebuild your property and replace your contents. Underinsurance therefore primarily refers to an insufficient insurance policy for your property or house. There are multiple factors that can affect or cause underinsurance such as an incorrect property valuation, a requirement for professional rebuilding costs and increasing home improvement costs. 

This guide to avoiding underinsurance should assist you when it comes to insuring your home and contents and how to make sure you have sufficient insurance in place to cover the cost of rebuilding your home or replacing your contents, if the need arises.

What is underinsurance?

Underinsurance occurs when the sum insured is not adequate to cover the full cost of rebuilding, repairing, or replacing all items as new. In the event of a claim, this may result in a policyholder not receiving the full amount necessary to rebuild, repair or replace items as new.

How underinsurance happens?

Underinsurance can occur for many reasons, often as a result of a miscalculation of the rebuild or replacement costs, or when new items or changes are made and not accounted for.

What is condition of average clause?

The condition of average clause allows insurers to reduce the liability for the damage in proportion to the amount of underinsurance. This means that if the amount insured for your building or contents are less than the full rebuild cost of the buildings or replacement of contents at the time of loss or damage, the amount you can claim may be reduced because you may not have fully insured the risk.

Put simply, this means that if you paid a premium associated with the risk you disclosed, you can’t claim over and above what you have paid for.

An example of underinsurance and how it can impact you:

• A home has a rebuild cost of €300,000 but is only insured for €225,000, so only 75% is insured and 25% is underinsured.
• Claim for partial damage to the house of €10,000 is made. Then, *75% or €7,500 will be paid out for the claim.
• Claim for total loss: *€225,000 is the maximum that will be paid out as this is the amount the home has been insured for.

*Subject to terms, conditions, and exceptions of the policy.

How can you get underinsured?

There are a number of different factors that cause underinsurance. A common mistake is to insure your home for the market value of the property when you should in fact be insuring it for the full rebuild cost of your home.

Inflation is another factor. Rising inflation costs, along with other factors like the ongoing impacts of political instability, have all affected many areas including increased costs in the construction industry. This has led directly to increases in the costs of rebuilding a home, and if not taking into account when insuring your home, could see you being underinsured.

What happens if you make a claim on an underinsured property? 

The best way to illustrate what can happen if you are underinsured and need to make a claim are with the two examples below – one is for partial loss and the other for total loss:

Example A: Partial Damage

• Pat and Mary have their home insured for €180,000.
• The cost to fully rebuild is €300,000.
• This means it is underinsured by €120,000 (40%).
• Fire damage occurs to the kitchen.
• It will cost €100,000 to repair.
• As the house has been underinsured by 40%, a deduction of 40% is made from the cost of the repair.
• Therefore, the most Pat and Mary will receive in a claim is €60,000*. 

Example B: Complete/Total Loss

• Pat and Mary have their home insured for €180,000.
• The cost to fully rebuild is €300,000.
• This means it is underinsured by €120,000 (40%).
• Fire damage occurs to the house requiring a complete rebuild.
• The cost to fully rebuild is €300,000.
• As the house has been insured for €180,000, the most Pat and Mary will receive in a claim is €180,000*.

*Subject to terms, conditions and exceptions of the policy.

How to determine if your home is sufficiently insured

Determining how much home insurance cover you will need will depend on several factors and considerations, such as the rebuild cost of your home, the age and other characteristics of your property.

The house rebuild calculator, is a handy tool that can help you establish the rebuild cost. This calculator is based on information released by the Society of Chartered Surveyors and is intended as a guide only, to give you an indication of the rebuilding cost of your house. To be totally confident that your home is adequately insured, an independent surveyor can calculate the exact rebuilding cost of your home.

When deciding how much you should insure your house for, check out our FAQ for more on this.

Steps to avoid being underinsured

• Each year, homeowners should review the amount for which they have insured their buildings and contents, especially in times of high inflation. Adequately setting your sums insured from the start of your policy/last renewal is key to preventing underinsurance. 
• If you have made changes, additions or upgrades to your home during the policy period, it’s important that you review your insurance to ensure you aren’t underinsured now that upgrades have been completed.
• Consider any wider economic factors that may need to be accounted for when setting/reviewing your sums insured. These can include inflation, the costs of materials or contents, or the availability and cost of labour. Your sums insured may need to be amended to reflect any changes as a result of these factors.
• Homeowners should also look out for policies which include ‘inflation protection’ or an ‘index clause’ which may inflate the sums insured in line with inflation index.
• To be totally confident that your home is fully insured, contact an independent surveyor, who will calculate the exact rebuild cost of your home. The Society of Chartered Surveyors rebuild calculator give an indication of the rebuilding cost for your home at scsi.ie.
• Check out our tips to avoid underinsurance in order to best protect you and your home in the event of loss or damage.

Some common questions around underinsurance

How do you calculate underinsurance?

The formula for calculating underinsurance is: Sums insured /replacement cost X the loss amount = The claims settlement*.

The example used earlier in this article shows that if a home has a rebuild cost of €300,000 but is only insured for €225,000, i.e., only 75% insured, that means that it is 25% underinsured. If there is a partial damage claim to the house for €10,000, then only 75% will be paid out for the claim which equals €7,500*.

What is the difference between over insurance and under insurance?

Underinsurance is when the property and/or contents are not adequately insured, whereas over insurance is when the property and/or contents are insured in excess of the value of the property or contents. 

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

The market value of your home is how much you would get for your home if you put it up for sale, whereas the rebuild cost is how much it would cost to rebuild you home in the event of total or partial loss.

Our inflation leading to underinsured homes blog highlights that inflation could be leading to underinsured homes with over one third of homeowners unaware that premiums are calculated on the rebuild cost and not the value of their home. Increased construction and building material costs in recent times have seen the costs involved for the rebuild of a home increase, so it’s important to adequately insure your home based of the rebuild costs and not the market value of the home.

Safeguards to help prevent your home being underinsured

At Zurich, we want to ensure our customers are supported and equipped with the knowledge needed to make informed decisions around their insurance policies.

We have a number of safeguards in place to help our home insurance customers including:

• Your policy is index-linked which means in times of inflation and in line with your policy terms and conditions, we will adjust your buildings and contents sums insured at renewal to take account of inflation. 
• We also monitor inflation throughout the policy period and in line with your policy terms and conditions. When applicable, we will not adjust your buildings and contents sums insured but instead we will automatically make an allowance for the impact of inflation when assessing a claim under your policy. This allowance will be made at no extra cost to you.
• It is important to note that index-linking is not specific to your property and relying on index-linking alone may not be sufficient to protect you from underinsurance, especially at renewal or during the policy period if you have made changes, additions or upgrades to your home. It is vital that you review your sum insured regularly to ensure you have adequate cover to meet your needs. For more information on index linking, please refer to your policy booklet.

*Subject to terms, conditions and exceptions of the policy.