Financial Strain – A shortfall in a claim payout can result in significant out of pocket expenses. These can reduce the ability to replace critical equipment or stock. This can lead to extending the time it takes to effect necessary repairs resulting in prolonged downtime, loss of income, or even closure. For individuals, it can mean not being able to afford necessary repairs to homes or other valuable assets. potentially draining savings or pushing them into debt
Emotional stress – When you have to make a claim, realising that an insurance policy is insufficient can be extremely distressing. The financial burden, combined with the shock of inadequate coverage, can lead to stress and anxiety for policyholders and their families.
Reduced Claim Payout – When any assets are underinsured, the payout from a claim will likely be much lower than the actual cost of repair or replacement.
Legal and Reputational Risks – For businesses, underinsurance can lead to legal liabilities if they cannot meet their obligations (e.g., customer contracts or employee compensation). Additionally, underinsurance may harm a company’s reputation if they are unable to recover from a loss quickly, impacting relationships with clients or suppliers.
What is the average clause?
Most UK insurance policies contain an average clause, which reduces the claim payout proportionally to the level of underinsurance. For example, if a property is insured for 50% of its true value, then only 50% of the claim amount will be paid out, regardless of the total loss. Again, by way of example, if a business has a total stock value of £200,000 and only insures for £100,000 and they suffer a loss of £100,000 the claim settlement will likely be no more than £50,000.
What should I do?
Review & update your insurance covers regularly – take immediate steps to assess your current cover. Ensuring that the value of your assets (whether personal or business) is accurately reflected in your policy.
Invest in valuations – For owners of properties, businesses, or high-value assets, investing in professional valuations or rebuild assessments can ensure your cover matches current replacement costs.
Avoid the temptation to cut costs – While cheaper premiums may seem appealing, underinsurance can cost far more in the long run
Consult an expert – Speak with an insurance broker or agent to conduct a comprehensive review of your cover. They can help you understand the nuances of your needs, including any clauses that might limit payouts and suggest appropriate cover adjustments. A property professional can advise regarding property reinstatement values whereas an accountant can advise regarding business interruption figures . A solicitor could assist with identifying contractual or legal risks to your assets in order to ensure full cover for them.
