The current global situation - from the recent pandemic to the war with Ukraine - has seen the cost of living rise exponentially, affecting not only food and fuel prices but also supply of materials and the value of imported goods. Some economists predict inflation could exceed 14% in the UK by early 2023; and whilst in the Channel Islands and Isle of Man inflation has remained lower than in the UK, claims settlements across the Islands are nonetheless influenced by UK inflation. But what do rising costs mean for your Property Insurance?
For property owners, escalating costs may affect your insurance in ways you don’t expect: such as the increased risk of being underinsured in the event that major repairs or a rebuild is required. In this blog, we’ll help you get ahead of underinsurance, providing expert advice and some practical steps to take now.
What is Property Underinsurance?
Property underinsurance, in a nutshell, is when a policy doesn’t provide sufficient cover to either replace your belongings (in the case of Contents Insurance) or to cover you in the event that something major happens to your property (Buildings Insurance – which we’ll be focusing on in this blog).
Simply put, buildings should always be covered for the total rebuild amount, not the resale value; but determining that cost, particularly in the current global climate, can be tricky. Cover should be adjusted regularly to reflect inflation (as well as other factors), but many property owners don’t realise this – until it’s too late.
What about Inflation?
We’re living in a global environment of rapid and unpredictable change, influenced by the impacts of Covid; the increase in fuel/food prices (largely due to the war in Ukraine); the effects of Brexit; and the drop in value of sterling against the dollar. These, and other factors, are driving inflation to unprecedented levels. But how do inflationary factors impact insurance?
It was recently announced that The Bank of England expects inflationary pressures to continue well into 2024; and this unfortunately means that, whether you live on the, Isle of Man, Guernsey or Jersey, your insurance is likely to be affected. For example, index linking values - the measure applied by insurers to ensure an asset’s insured value is adjusted in line with various factors, such as inflation, deflation, and the cost of living – are influenced by UK inflation and other trends. Adjustments to index linking values could mean that an asset you’ve insured based on a previous assessment of value may not be covered now, because the value would have changed; so it’s more important than ever to check your property insurance policy thoroughly to avoid underinsurance.
Ian Stewart, Cherry Godfrey’s Group Director of Insurance, states: ‘First of all, property owners should not panic: insurers are aware of the challenges posed by a fluctuating market, and, provided they act in a timely fashion, they will not be caught short. It is, however, vitally important that properties are insured for the adequate amount. This amount should be based on the rebuild value - adjusted to reflect current conditions - and not the market value of their property.’ It can be difficult for property owners to picture the worst happening, but it’s crucial that they do so: ‘The buildings sum insured should be sufficient to cover a worst-case scenario - such as an event which causes total devastation. In this instance, the full reinstatement cost would cover site clearance, demolition, and professional fees as well as reconstruction. Bear in mind that if you do not have the adequate cover on your buildings at the time of the loss, your insurers could apply the ‘Average Clause’: that is, where they deduct the settlement in proportion to any underinsurance.’
The ‘Average Clause’: Explained
As mentioned above, if you needed to make a claim on your Buildings Insurance and were underinsured, your insurer could invoke what is known as the ‘Average Clause’. What this means, in essence, is that the insurer would only pay a percentage of your claim (based on the level of underinsurance); and, as such, you’d run the risk of being dangerously out of pocket (or unable to rebuild your home or make vital repairs).
An example of a potential claim
Here is a scenario in which underinsurance would result in the ‘Average Clause’ being invoked, leading to a significant shortfall:
Sarah’s home suffers substantial damage in a fire. The reinstatement costs are £30,000. Her property is insured for £650,000. However, the actual rebuild value at the time of the loss is £900,000.
The insurer applies the ‘Average’. This results in a settlement of £21,666.66. In order to bring the property back to pre-loss condition, Sarah must make up the shortfall: a substantial cost of £8,333.
How to Avoid Property Underinsurance
First of all, it’s always best to be overinsured rather than underinsured. Always consider including Accidental Damage cover to your policy.
In addition, we’d recommend appointing a specialist to carry out a rebuild valuation. As part of this process, you’ll be given in-depth insights into the amount needed to completely rebuild your home (including the cost of labour and materials).
Do remember that these are not normal times: the amount that your insurer would adjust your policy by annually (to reflect inflation) is unlikely to suffice. With this in mind, do consider undertaking rebuild valuations at regular intervals – annually or every couple of years to be safe.
If you would like to discuss your property’s rebuild value, please contact insurance@cherrygodfrey.com
