house and buildings cover under insured

tracy64

has anyone ever heard of under insured cover, aparantly as i understand it it means if your building costs 100,000 to rebuild and youre only insured for 50,000 the insurance company will only give you at best 25,000 because you were underinsured by 50% and maybe not even pay anything, this also goes for home contents insurance, can anyone improve on this information

FlameCloud

Yes, its known as average.

Essentially, in policies with a set sum insured there should be a clause in the T+C's saying something along the lines of if you are underinsured then you agree to act as a second insurer for the remainer of the items.

In practise, this means the insurer will have three options-

1. Avoid the entire policy, if the underinsurance was severe enough to warrant deliberate non disclosure.
2. Allow the policy holder to pay the increased premium for the correct sum insured and deal with the claim as normal. Note this would mean back to policy inception.
3. Average the claim. This means that the insurer will only pay what proportion you are underinsured for. The formula used is-

Amount of payment= (Sum insured (SI)/What it should be insured for) * Claimed amount.

For example if you have a loss of £5,000 with a SI of £50,000 when it should be £75,000 you would get-

(50,000/75,000) * £5,000 = £3,333.34

dunstonh

Flamecloud has given the ideal response so not much else to say. However, I will just add that under insurance terms on claims have long been established and although they are tweaked periodically (especially in areas of intentional or inadvertant disclosure) the principles have remained consistent and the reduction in claim to amount underinsured is the most common method used.

dacouch

I agree with Flamecloud and Dunstonhs posts and would point out that if you have a claim where a Loss Adjuster is involved this is commonly claims in excess of around £1000. One of the first things a Loss Adjuster will do is calculate your sums insured to see if you are uninsured and report back to the Insurer if you are.