Underinsurance means your buildings sum insured is lower than what it would actually cost to rebuild your home. It matters because of the way insurers respond to it: under the principle known as “average”, a claim payment can be reduced in proportion to the shortfall. Insure a house for half its rebuild cost and even a small claim may be paid at half its value.
Rebuild cost is not market value
The single most common cause of underinsurance is insuring a home for its purchase price or market value. The buildings sum insured should be the reinstatement cost: demolition, site clearance, professional fees and rebuilding the house as it stands. For a standard estate house that figure is often lower than market value; for a period property, a listed building or anything with non-standard construction it can be far higher.
How does the average clause work?
Where a policy applies average, the payout is scaled by the ratio of the sum insured to the true rebuild cost. A house that would cost £400,000 to rebuild but is insured for £200,000 is 50% underinsured. A £40,000 kitchen fire claim on that policy can be paid at £20,000, with the balance falling on the homeowner. The reduction applies to partial losses, which is what most claims are; you do not need the house to burn down for underinsurance to hurt.
What is index linking?
Most home policies adjust the buildings sum insured each year in line with rebuilding cost inflation, typically using the House Rebuilding Cost Index produced by BCIS. Index linking only maintains a figure that was right to begin with. If the starting sum insured was wrong, indexation preserves the error, and it does not capture extensions, renovations or anything that changed the property since the figure was set.
How do I get the rebuild cost right?
For a standard house, a rebuild cost calculator based on BCIS data gives a reasonable figure. For anything non-standard, high value, extended or listed, a professional reinstatement cost assessment is the reliable route, refreshed periodically and after any significant alteration. Tell your insurer about building work when it happens, not at the next renewal.
Does underinsurance affect the duty to give a fair presentation?
They are related but different. The sum insured is your responsibility to set adequately; answering the insurer’s questions honestly and accurately is a separate duty with its own consequences, covered in our guide to answering insurance questions correctly. Get both right and claims get paid without argument.
Talk it through
As an insurance broker, Solar Insurance Services can help you sense-check the basis of your buildings cover, particularly for non-standard or higher-risk homes. See our personal insurance page, or get in touch.