Taking steps to avoid underinsurance now could save an expensive loss later says Paul Jacobs, Aon’s Claims Director for private clients.
Insurance is like any market; when supply contracts but demand remains strong, prices will rise. This current so-called insurance hard-market is no different and, as insurers reduce their appetite, most insurance classes of business, including for owners of high value homes/estates and contents, are seeing premium rate rises. But it’s not just about premiums going up; one often less noticed symptom of a hard-market is how an insurer treats claims.
Insurers are of course paying valid claims to the correct policy limits and to the correct sums insured, but where there are grey or contentious areas and the claim isn’t clear cut, then insurers are being more robust in their decisions which sometimes leads to reduced payouts.
That means it is critical private clients take steps against underinsurance by, for example, ensuring they have up to date valuations and accurate sums insured for both their buildings, and valuables and contents.
An ‘average clause’ payout can leave you short
Underinsurance is a perennial problem and many insurance polices include an ‘average clause’ as a way of protecting insurers against the issue. If there is a claim an insurer will apply the ‘average clause’ and reduce the amount paid out if it appears the policy holder had underestimated the value of whatever is being claimed for; the insurer arguing that the correct premium had not been paid in the first place.
It is why an ‘average free’ policy can be more attractive because your claim will not be proportionately discounted to the amount of underinsurance. Under ‘average free’, if you insure an outbuilding for £100,000 for example, but it should have been insured for £150,000, insurers won’t deduct the underinsurance value as they would under an ‘average clause’ and you will get the full £100,000.
The importance of a current valuation
Of course, even under ‘average free’ there can still be a shortfall if you haven’t insured for the correct amount, which takes us back to the importance of keeping values up to date. If you have a recent valuation – less than five years – of a piece of art for example, there’s clarity and your sums insured can be tailored accordingly. But say you tell an insurer your Canaletto picture postcard was worth £1 million ten years ago, but it’s now gone up in value by £250,000, that increase in value will potentially be uninsured if your insurer doesn’t know about it.
Regular valuations can be costly, so how do you protect against those increases in values if you don’t want to do another valuation or survey? There are alternative ways in which a broker can help you future proof values by inserting certain clauses, or creating endorsements on policy wordings that will help avoid underinsurance.
During the renewal process and at a mid-year review, it’s also essential to look at sums insured to account for changing circumstances. Over the year, people buy additional gifts like jewellery, watches or fine art forgetting that the value of these items should be reflected in their insurance cover. Your insurance on day one of a policy doesn’t necessarily reflect what cover needs to be on day 365.
Use a room calculator
There are other simple steps to avoid underinsurance like using a room calculator – available on many insurer websites – to help assess the contents value for each room and what the totals will mean for your sums insured. And, it’s time to think outside your home. What are in your outbuildings for example? Do you run/own an estate and have employees who live on site who have their own tools and equipment? An employee might assume their tools are insured by the owner of the estate but find out they’re not after experiencing a theft. These items are inexpensive to add in terms of additional premium – but will protect you and your employees from an expensive loss.
Don’t assume index-linked is enough
When we talk about underinsurance it’s not just about fine art, jewellery or a wine collection either, it’s also about buildings. Most insurers will index-link buildings values for their polices, but is that enough for a historic home which might be constructed using heritage methods such as lath and plaster, oak panelled walls, and fine artwork sculpture? With these features, it might be necessary for sums insured to go up by 5% annually as opposed to an index linked amount of 2%.
Many may also be insured on a first loss basis – where an insurer agrees to cover only part of the value of a house – to take advantage of a reduction in premiums, but this would not be adequate in the event of widespread damage to a property.
The best claim is the one that never happened
These are measures every private client should take to guard against being underinsured and losing out in the event of a claim. But the best claim of course, is the one that never happened and work spent on prevention is a great investment of time and money.
One of the biggest costs to insurers for example, is water damage from burst pipes, flooding or water simply getting in to a property through a defective roof. If you can show that you clean out water gullies, guttering, maintain pipework and keep an eye on led flashing and vulnerable flat roofs, it will not only prevent a claim but also help to promote your risk as an attractive one for insurers.
In this hard-market, the better your risk looks to an insurer then the better the outcome when it comes to limiting premium increases and any restrictive changes in terms and conditions.
Whilst care has been taken in the production of this article and the information contained within it has been obtained from sources that Aon UK Limited believes to be reliable, Aon UK Limited does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the article or any part of it and can accept no liability for any loss incurred in any way whatsoever by any person who may rely on it. In any case any recipient shall be entirely responsible for the use to which it puts this article.
This article has been compiled using information available to us up to 15/01/21.