How to avoid underinsuring your home

Rise of underinsurance in home policies

In recent years, the issue of underinsurance in the home insurance market in Ireland has been on the rise. According to a review by the Central Bank of Ireland, the percentage of underinsured homeowners increased from 6.5% in 2017 to 16.5% in 2021. This trend is driven largely by escalating construction costs, including higher prices for materials, labor, and energy (Central Bank of Ireland).

Ensuring your home is adequately insured is crucial in today's economic climate. Underinsuring your home can leave you vulnerable to significant out-of-pocket expenses if you need to make a claim. It's essential to regularly review and update your insurance policy to reflect the current rebuild costs and the value of your home's contents. By doing so, you can protect yourself from the financial risks associated with underinsurance and ensure you receive the full compensation needed to cover any potential losses (Central Bank of Ireland).

By understanding the importance of proper home insurance coverage and taking proactive steps, you can avoid the pitfalls of underinsuring your home and safeguard your financial well-being.

Underinsuring your home explained

Underinsuring your home means having an insurance policy that covers less than the actual cost of rebuilding or repairing your home and replacing its contents. This gap in coverage can occur when the insured sum is based on outdated valuations or incorrect estimates. Interested to know more about underinsurance, check out our underinsurance guide.

The implications of underinsurance are significant. If a mishap such as a fire or severe weather damages your home, you may not receive sufficient funds from your insurance to fully cover the repair or rebuilding costs. This shortfall can result in substantial out-of-pocket expenses, leaving homeowners financially strained during an already stressful time.

Additionally, with rising inflation, construction costs have increased significantly, making it even more critical to ensure that your insurance coverage reflects the current market conditions and rebuild costs. Regularly reviewing and updating your policy can help avoid the pitfalls of underinsurance and ensure you are adequately protected (Central Bank of Ireland) (World Health Organization (WHO)).

Rebuild Cost vs Market Value

Understanding the distinction between rebuild cost and market value is essential to avoid underinsuring your home. The rebuild cost refers to the expense of rebuilding your home from scratch, including materials, labor, and any additional fees such as debris removal and professional services. In contrast, the market value is the price at which your home would sell on the real estate market.

Knowing these differences is crucial because insuring your home for its market value might leave you underinsured if the rebuild cost is higher. Rising inflation and construction costs further exacerbate this issue, making accurate rebuild cost estimates more important than ever.

The Society of Chartered Surveyors Ireland (SCSI) provides valuable resources to help homeowners calculate their rebuild costs accurately. Tools such as the SCSI House Rebuild Calculator and the detailed House Rebuilding Guide offer guidelines to ensure you have adequate insurance coverage.

Examples of underinsuring your home

The average clause formula is crucial in insurance, especially when calculating claims for underinsured properties. The formula ensures the payout is proportional to the amount insured versus the actual value. It is calculated as:

This clause protects insurers from paying out more than the proportionately insured value.

Example 1: Partial loss with rising inflation

Premise: Due to rising inflation, the current rebuild cost of a home has increased from €250,000 to €400,000. A partial loss occurs, resulting in damages worth €100,000.

• Rebuild cost (Sum Insured): €250,000
• Current rebuild cost due to inflation: €400,000
• Insurance policy sum insured: €250,000
• Partial loss amount: €100,000

Financial impact on home owner

• Total loss amount: €100,000
• Insurance claim payout: €62,500
• Shortfall to be covered by homeowner: €37,500

Example 2: Total Loss

Premise: The current rebuild cost of a home has increased to €500,000, but the insurance policy remains based on a rebuild cost of €250,000. A total loss occurs.

• Rebuild cost (Sum insured): €250,000
• Current rebuild cost: €500,000
• Insurance policy sum insured: €250,000
• Total loss amount: €500,000

Financial impact on home owner

• Total loss amount: €500,000
• Insurance claim payout: €250,000
• Shortfall to be covered by homeowner: €250,000

 

5 things that can cause underinsurance

Ensuring your home is adequately insured is crucial to avoid significant financial strain in the event of a loss. Several factors can lead to underinsurance, making it essential to understand and address them effectively.

Home improvement:

Home improvements, such as adding a new room, upgrading the kitchen, or installing high-end fixtures, can significantly increase your home's rebuild cost. If these enhancements are not updated in your insurance policy, you may find yourself underinsured. For example, a renovated kitchen with modern appliances and custom cabinetry can add substantial value to your home. Always notify your insurer about any significant home improvements to ensure your coverage accurately reflects the increased rebuild value .

Rolling renewal:

Rolling renewal refers to the practice of automatically renewing your insurance policy each year without reviewing and adjusting the coverage amounts. This can lead to underinsurance, especially as construction costs and home values change over time. Without periodic reassessment, your policy might not keep up with the increasing rebuild costs, leaving you with inadequate coverage. Regularly reviewing your policy and updating the insured amounts is crucial to maintaining adequate protection.

Underestimating the rebuild cost:

One of the most common causes of underinsurance is underestimating the rebuild cost. Homeowners often insure their property based on its market value rather than the actual cost to rebuild, which includes materials, labor, demolition, debris removal, and professional fees.

Value of home contents:

Many homeowners undervalue their personal belongings, leading to underinsurance. Items such as electronics, furniture, and clothing can add up to a significant amount, and if not accurately covered, can result in financial shortfalls in the event of a claim. Conduct a thorough inventory of your home contents and ensure they are adequately insured. Using a contents calculator can help determine the accurate value of your possessions.

Inflation costs:

Inflation and rising costs of construction materials and labor can significantly impact the rebuild value of your home. If your policy does not account for these factors, you may find that your coverage is inadequate when you need it most. Make sure your home insurance policy is indexed to inflation or regularly update the insured amounts to reflect current market conditions. This will help ensure that your coverage keeps pace with the actual cost of rebuilding your home.

 

5 tips to avoid underinsuring your home

Calculate the accurate rebuild cost:

Use a rebuild calculator, like the one provided by the Society of Chartered Surveyors Ireland (SCSI), to determine the accurate rebuild cost of your home. This includes costs for materials, labor, site clearance, and professional fees, ensuring your insurance covers the true cost of rebuilding from scratch.

Regularly review and update your policy:

Regularly review your insurance policy, especially after making renovations or additions to your home. Keeping your policy up-to-date ensures that any improvements are covered, preventing underinsurance due to outdated valuations.

Consider inflation and rising costs:

Inflation and rising construction costs can significantly impact the rebuild value of your home. Make sure your policy reflects current market conditions to avoid a shortfall in coverage if you need to make a claim.

Seek professional advice:

Engage with a chartered surveyor or insurance advisor to assess your home's value accurately. Professional advice can help ensure that all aspects of the rebuild cost are considered, providing you with peace of mind and adequate coverage.

Understand the average clause:

Familiarize yourself with the average clause formula, which adjusts claim payouts based on the proportion of the insured value to the actual rebuild cost. Understanding this clause helps you appreciate the importance of insuring your home for its full rebuild cost to avoid significant out-of-pocket expenses during a claim.

 

By following these tips, you can protect your home against underinsurance and ensure you are adequately covered in the event of a loss.