Don’t overlook Underinsurance

by | Sep 22, 2023

In times of economic uncertainty when income streams are under pressure and costs are spiralling it is only human nature to look for ways to reduce your outgoings.

Insurance can feel like a soft target, we all plan for the worst but feel that it’s never likely to happen. It can be tempting to not increase the sum insured when you buy that new piece of equipment, or in line with your Insurer’s recommended figure for index-linking as prices can often be reducing shortly afterwards.

This might save you money on your premium, however, it could also have implications in the event of a claim – even if you do not suffer a total loss of your property.

To put things into context not adding a lap top computer costing £2,500 to your Contents sum of £25,000 could save you £67.20. Similarly, if you have a building with a sum insured of £1,000,000 and you elect not to uplift this by the Insurer’s recommended index-linking factor of 8.9% this could save you £219.30.

One month after the renewal of your policy you suffer an escape of water claim resulting in damage to the building of £45,000 and Contents of £10,000.

When settling your claim your Insurer will base any settlement upon the value of your property at the time of loss and compare this to the policy sum insured. If the policy sum insured is below the replacement value, they will class this as underinsurance.

In the circumstances detailed above the claims settlement would be calculated as follows

Item Policy Sum

Policy Sum Insured/Replacement Value X Loss

Claim Payment


£1,000,000/£1,089,000 X £45,000



£25,000/£27,500 X £10,000



Rather than a claim payment of £55,000 a payment of £50,413.14 will be made meaning that your premium saving of £286.50 has cost £4,586.86 due to the reduction in the claim payment. And in hindsight, you would know what you would rather have done! 

What can you do to avoid underinsurance?

Have a reinstatement (rather than market) valuation of your buildings carried out. Most Insurer’s would recommend that this be carried out every three to five years. The sum insured on your policy should reflect this value.

Keep an up-to-date register of your assets, again ensuring that the sum insured on your policy reflects the total value of the assets that you own. 

By taking these relatively simple steps, you can help to minimise the risk of underinsurance and the adverse consequences for your organisation.  

As ever, the team at Keegan & Pennykid would be delighted to assist with any queries or requests that you may have. 

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