Explainer – How can I avoid being under-insured on my home?
When was the last time you checked your home insurance?
Work by Central Bank of Ireland has found an increasing number of households in Ireland are under-insured on their home insurance policies.
This means that, if you make a claim, you may have to pay costs from your own pocket that you might expect to be covered by your insurance.
What is under-insurance?
Under-insurance is when the sum insured on your insurance policy is less than the cost of rebuilding or repairing your home, or replacing its contents.
Being under-insured can leave you at risk of not being fully covered for your losses if you have to make a claim.
To avoid being under-insured, when insuring your house, you should insure it for its full rebuild cost.
The rebuild cost is the actual cost of rebuilding your house from scratch in the event it is totally destroyed.
This is different from the market value – the price of your house if you sell it.
In the case of cover for the contents of your home, you should make sure that the amount of contents covered by your policy is appropriate to the amount it would actually cost to replace your contents.
How can under-insurance affect partial claims?
This shortfall on claims payments can also happen in cases of partial damage or loss of contents.
This is because insurance policies typically contain a “condition of average” or an “average clause”.
The average clause can reduce the amount of money paid against your claim by the proportion you are under-insured.
For example, if your house has a rebuild cost of €200,000 but is only insured for €100,000, this means you are only 50% insured.
If you make a claim for partial damage of the house for €50,000, then only 50% of the €50,000 will be paid out by your insurer.
This means you will be paid €25,000 of your claim and will have to pay the other €25,000 yourself.
Why is this an issue now?
We are all managing an increase in the cost of living, including a rise in the cost of building and materials generally.
Because of these increased costs there is an increased risk of under-insurance of homes.
The Central Bank has found that under-insurance in the home insurance market has steadily increased over the last five years.
An average of 16.5% of paid claims were under-insured in 2021 compared to 6.5% in 2017.
What can I do to avoid this?
You should review the level of buildings and contents cover you need on a regular basis (including when you are renewing your insurance).
This means focusing not just on the cost of the premium alone but also on making sure it is providing you with the right level of cover.
In some cases, you might look at the level of cover and find that it is too high, e.g. for contents, and in such a case you should consider reducing it, which can reduce your premium.
The key thing is that the level is appropriate to what you need.
Some of the reasons to review your level of home insurance (building and contents cover) include:
- When you undertake any home improvements, such as installing a new kitchen or bathroom
- When you build an extension
- When prices increase.
When renewing or taking out a new home insurance policy, think about when you last had your house valued.
If it has been a number of years, you should consider taking a look at what value you have insured your house for, including the cost to rebuild.
You may wish to consider using a property valuation service. Alternatively, online tools – such as the Society of Chartered Surveyors Ireland house rebuild calculator – can help you estimate the rebuild cost.
Our expectation of insurers and insurance brokers
The Central Bank requires insurers and brokers selling insurance to take action to support policyholders.
Insurers have to ensure you are properly informed about the risk of being under-insured, and give you relevant and clear information when you take out, or renew, your insurance policy to avoid this risk.
Insurance brokers also have obligations to ensure they provide you with good advice and guide you towards the most suitable policy to meet your needs.
They are also required to explain under-insurance to you, the consequences of being under-insured, the reasons why this a risk and how you can better estimate the adequate sums insured value.
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