The perils of underinsurance

What is underinsurance?

Put simply, underinsurance means your cover is set too low for the value of what you’re insuring.

When you arrange buildings or contents insurance, you are generally asked for the ‘sum insured’, which is the total value of:

• the items you want covered (for contents), or
• the full cost of rebuilding the property (for buildings), including fees and debris removal.

Insurers use this figure to assess the risk they are taking on and to calculate your premium. If the sum insured is too low, you may be underinsured.

Some people are tempted to insure for less than the full amount, thinking:

“My contents are worth about £50,000, but I can’t imagine ever losing everything, so I’ll insure for £25,000 to keep the premium down.”

This approach can turn out very costly if you ever need to claim.

How the ‘average clause’ works

Many policies contain what is known as an ‘average clause’. This means that if, at the time of a claim, the insurer finds you are underinsured, any claim payment can be reduced in proportion, even if you have lost everything.

A simple example of underinsurance

True value of your contents at the time of the incident (the “value at risk”): £50,000

Sum insured shown on the policy: £30,000
Amount you need to claim: £35,000
Policy excess: £100

Because the sum insured (£30,000) is only 60% of the true value (£50,000), in this example, the insurer would only pay 60% of the claim:

£35,000 (claim) × £30,000 (sum insured) ÷ £50,000 (value at risk) = £21,000
Less £100 excess

= £20,900 settlement

In this situation, the policyholder has suffered losses of £35,000 but receives only £20,900; £14,100 less than the value of their loss, because the contents were underinsured.

Why it can be easy to be underinsured

It can be surprisingly difficult to estimate the true value of your contents or the cost of rebuilding a property. Common issues include:

• Forgetting to include items like carpets, curtains, fixtures, fittings or specialist equipment.
• Using your original purchase price rather than the current replacement cost as new.
• Not updating sums insured when you buy new items, improve or extend your property, or invest in additional equipment.

Over time, the value of your belongings or the cost of rebuilding can increase significantly, especially with inflation and higher building costs. If your sums insured do not keep pace, you can slip into underinsurance without realising it.

Simple ways to check you’re not underinsured

To help protect yourself against underinsurance, it can be useful to:

• Review your sums insured regularly - at least once a year, or whenever you make significant changes or purchases.
• List your contents and work out what it would cost to replace them as new today, not what you originally paid.
• Consider whether you also need to insure tenant’s improvements, your stock or any specialist business equipment.
• For buildings, use a recognised rebuild cost guide or, where appropriate, seek a professional valuation.
• Keep copies of receipts, valuations and photographs where possible, to help support any future claim.

Your insurance broker can talk you through these points and help you think about what might need to be included.

Underinsurance in summary

Underinsurance could mean a much lower payout if you need to claim. Setting the right sums insured, and keeping them up to date, is an important part of protecting your property, your business and your financial position.

If you’re unsure whether your cover is adequate, or if you would like help reviewing your existing arrangements, please contact Balens or your usual insurance adviser.

N.B. This blog is for general information only and does not constitute advice or a recommendation. Insurance cover is always subject to the specific terms, conditions, limits and exclusions of the policy. If you are unsure what cover you need, please seek appropriate advice.

June 2026 | FP26176