Under-insurance leaving thousands of householders exposed
Nobody needs reminding that we’re in the midst of a cost-of-living crunch.
With the price of pretty much everything rising, we’re looking for ways to make savings wherever we can, from the weekly shop to the utilities and, perhaps especially, financial products.
One area where householders might be tempted to cut corners is on their house insurance with some ‘low balling’ the value of their homes on the largely misguided assumption that they might save some cash on their policies.
In the event on them needing to draw on those policies, they could find that they are under-insured, leaving them significantly out of pocket when it comes to rebuilding or repairing.
Indeed, more and more people may have inadvertently found themselves in an under-insurance scenario of late with the cost of rebuilding escalating on the back of soaring construction prices.
Step up in under-insurance
A Central Bank study on under-insurance here published in recent months concluded that the incidence of it had grown significantly in recent years.
The review found that its prevalence had increased from an average of 6.5% of paid claims being under-insured in 2017, to 16.5% in 2021.
Under-insurance occurs when the sum insured on a property is less than the amount it would cost to rebuild or replace the property.
In effect, it means that if an under-insured policyholder makes a claim, an insurer can reduce the sum it must pay against the claim in proportion to how much the policyholder is under-insured.
And that also applies in the event of a partial rebuild or repair works.
Take, for example, a house with a rebuilding cost of €200,000 which is insured for only €100,000. If there is partial damage to the house of €50,000, then only 50% of that amount will be paid out by the insurance firm, equating to €25,000, leaving the policyholder exposed to paying the remainder of the repair cost.
For those who have had their claim reduced due to under-insurance, the average reduction in the claim payment was around 19% in 2021, the Central Bank study showed.
Much of the incidence of under-insurance is simply down to people not calculating the correct rebuild cost of their houses.
According to a survey carried out by Peopl.ie – an insurance provider that operates in collaboration with the credit unions – in excess of 40% of households could be using the wrong method of calculation.
“Many are insuring their homes based on incorrect valuations – be it the past or current property price, the amount outstanding on the mortgage, or the cost of the land on which the house is built,” Paul Walsh, CEO of Peopl.ie explained.
“It appears that people possibly use more than one of these values and amalgamate them. All of these approaches are incorrect, however, and really have no bearing on how much you should insure your home for,” he added.
There are rebuild cost calculators available which provide an accurate guide as to the correct amount to insure for and they take into account additional costs that are not immediately obvious.
“When calculating the base rates for rebuilding, it’s important to be aware that costs are calculated on a total loss situation,” Jonathan Hehir, MD of broker Insuremyhouse.ie said.
“That is, the building has been totally destroyed and has to be demolished, the site cleared, and the house completely rebuilt.”
Mr Hehir also recommended reviewing the sums insured regularly to reflect any alterations, improvements or renovations that may have been undertaken.
Mind the gap
The research from Peopl.ie indicated that Irish homeowners could be leaving gaps in their insurance of anywhere between €4,000 and €35,000, leaving them very exposed in the event of claim.
In some circumstances, it was found to be even higher than that.
“The most important message we’d like to see people take on board is to avoid confusing the market value of your house with its rebuild cost. Underestimating this important figure could mean your house is under-insured,” Mr Walsh said.
He acknowledged that the mistake was easily made.
Homeowners, for example, may not have reviewed the value of their property in a number of years, or they may have just used the SCSI (Society of Chartered Surveyors) average when they purchased their property and have not updated their policy since to reflect the changes in building and construction costs in the intervening years.
“It is vital that you keep your policy up to date with current rebuild costs,” he said.
Indeed, reviewing rebuild costs has become more urgent of late in light of the inflationary environment, which is impacting the construction sector in particular, with everything from materials costs to the price of labour being impacted.
According to the SCSI – which produces a regular index on rebuilding costs (as well as providing a rebuild cost calculator) – the national average cost of rebuilding a home in Ireland rose by just over a fifth in the year to last September, when its latest update was published.
It showed that the growth in rebuild costs in the year ranged from 14% in Dublin to 26% in the northwest, with the national average increase registering at 21%.
According to these figures, the minimum base cost of rebuilding a 3-bedroom, semi-detached house in Dublin is €268,000, while the minimum base cost of rebuilding a similar house in Waterford, is €225,000.
“Rebuild costs for a 3-bed-semi, the most common house type in the country, have increased from between €42,000 to €56,000 depending on where you live,” Kevin Brady, Chair of the Quantity Surveyors Professional Group in the SCSI noted.
“While these increases are considerable it does not necessarily mean the premium will increase significantly and consumers should shop around when seeking insurance cover for their home,” he added.
Cathie Shannon, Director of General Insurance at Brokers Ireland pointed out that most insurers would have an index-linking clause built into their home insurance policies, which should cushion the blow from some of the effects of inflation.
“It means that if there’s a change in the rebuild cost your amount insured will automatically increase by the percentage provided for in the policy,” she explained.
However, she cautioned that index-linking might be insufficient right now in the context of the elevated levels of inflation in construction.
She also explained that, in order for the index linking to work effectively, the rebuild value must have been correctly stated at the start of the policy.
Onus on insurers too
It’s not just the customer who has to keep a close eye on their policies to ensure that their cover is adequate.
Insurers also have a duty of care when it comes to their customers to ensure that they have adequate cover.
The Central Bank, in its report last year, warned insurance companies they must do more to alert customers to the possibilities that their homes are under-insured. Indeed, householders may have started to receive letters from their insurers warning them of the perils of under-insurance.
“Firms must communicate with all home insurance customers setting out the consequences of being under-insured, the reasons why this is currently a heightened risk and how policyholders can better estimate an adequate ‘sum insured’ value,” the Central Bank said.
“Some firms have proactively identified the risk to consumers, and have taken some steps to help mitigate the risk of under-insurance; however, all firms must take action to effectively mitigate the risk to the consumer.”
In the context of the current inflationary environment, that task has become ever more apparent.