Too many people fail to understand the dangers of underinsurance. Don’t be one of them…
What is underinsurance?
Underinsurance happens when your insurance policy doesn’t provide enough cover to fully protect your assets, property, or business.
In simple terms, you have insurance – but not enough of it.
Why is underinsurance an issue?
At first glance, underinsurance might seem like a way to save money on premiums. After all, some protection is better than none, right?
WRONG.
Underinsurance can lead to serious financial consequences in the event of a claim – leaving you or your business in a dangerously vulnerable position.
Key risks:
· Reduced payouts
In some cases, being underinsured can trigger something called the ‘average clause’. This means even a partial claim could be reduced.
For example, if your business is only insured for 50% of its true value, you may only receive 50% of any claim payout.
· Rejected claims
In severe cases, insurers may refuse to pay altogether if the policy significantly misrepresents the value of insured items.
· Business disruption
For businesses, underinsurance can halt operations entirely. Without enough cover, companies may struggle to replace equipment, repair premises, or meet liabilities – sometimes leading to closure.
· Limit growth
Many partners and regulators require cover for contracts. Some trading authorities and organisations may only work with companies that hold a specified level of insurance for certain activities. Failing to have the appropriate cover in place can limit opportunities and restrict business growth.
· Financial hardship
Underinsurance can leave individuals and businesses unable to recover financially after a loss. Many may need to rely on savings, loans, or even face bankruptcy.
Why does underinsurance happen?
Some of the most common causes of underinsurance include:
· Incorrect sums insured
In the event of a claim, you’re only insured up to the value of your ‘sums insured’ – which is the amount it would cost to get things back to normal after a loss. If this amount isn’t worked out properly, there’s a real risk of being underinsured.
An up‑to‑date reinstatement cost assessment (or survey) is usually the most reliable way to set an accurate sum insured.
Figures should NEVER be based on an educated guess or old information, and surveys should be carried out by a qualified surveyor.
· Underestimating the value of possessions
Undervaluing the cost of your possessions, or only accounting for more expensive items, can add up to a huge shortfall.
Neglecting to consider the impact of inflation, can also prove to be costly. And it’s recommended to get a professional valuation at least every 5 years.
· Ignoring improvements or upgrades
Fancy new watch? Updated machinery? Building extensions or loft conversion? It’s essential to update your policies after purchasing new items or carrying out improvements.
· A change in business
Forgetting to update policies when there’s a shift in focus, operational adjustments or new staff – or failing to properly calculate business interruption indemnity periods – can expose dangerous gaps in your cover.
Many people only discover they are underinsured when they make a claim – which is usually too late to fix the problem!
How can I avoid underinsurance?
There are a number of ways you can avoid being underinsured, such as:
- Carry out regular reviews
- Keep an up-to-date inventory of belongings or assets
- Calculate accurate rebuild or replacement costs (remember purchase price is unlikely to reflect current market values)
- Make sure your sum insured is correct
- Stay alert to new risks
- Adjust cover when your circumstances change (e.g. purchases, renovations or business growth)
- Work with an expert
Let us help
According to research by Aviva, cost isn’t the biggest barrier to having adequate insurance – lack of awareness is.
So why take the risk? Speak to our team.
We’ll help to identify any gaps in your cover, using our expertise to spot risks you might not have even considered.
Together, we’ll put the right protection in place – and keep it aligned with your evolving needs – so you can be 100% confident in your cover.