Underinsurance & Average

If your sums insured do not represent the full value at risk, you will not receive the full amount in the event of a claim.

Unless otherwise stated, cover is written on a reinstatement as new basis. It is therefore necessary for sums insured to reflect present day replacement / reinstatement costs, with a provision for inflation.

Not all insurers index link sums insured as of renewal. Therefore, it is important to check (i) how sums insured have been reached, and (ii) whether these need to be reviewed to ensure they remain adequate. 

Most policies carry an average condition, whereby in the event of under-insurance, a claim would be pro-rata adjusted down, in accordance with any degree of under-insurance.

• e.g. (Declared Value: £80,000  ÷ Full Value: £100,000) x (Claim Value: £50,000) = The proportion that will be paid by the insurer = 80% i.e. £40,000

The average condition applies to material damage and business interruption sums insured, prior to the application of any day one inflation provisions. N.B. Not all insurers apply index linking to sums insured and/or include Day One Inflation Provisions. 

Since recent changes to inflation have led to significant increases in the costs of materials, equipment, labour etc., further care needs to be taken to ensure that sums insured remain adequate in respect of all covers, at all times. Sums insured can be updated at any time during the policy period. 

It is important to review your policy covers to avoid the risk of underinsurance, resulting in the proportionate settlement of a claim.

In respect of Buildings sums insured, please review our ‘Property Sums Insured – How to Avoid Underinsurance‘ section and/or order a ‘Desktop Rebuild Cost Assessment‘ to ensure that your sums insured are adequate.

Please do not hesitate to contact us for further advice and guidance.