Underinsurance and averaging – what do I need to know?

If you have under-estimated the value of home contents, your insurer has the right not to pay out in full if you need to claim. They call this averaging. But you can protect yourself by accurately valuing everything in your home.

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Insurance companies protect themselves from people who don’t supply an honest value to their goods by using averaging clauses. This allows the insurer to come back to the policy holder with a reduced value claim payout.

It’s a situation everyone should avoid. If you tell your insurance company that the value of your entire home contents is £30,000 when the real substitute ‘as new’ value is £60,000 then you have paid only a percentage of the premium you legitimately should have paid.

That means in the event of a claim you only get a proportion back. For example, let’s imagine you have a ‘£30,000’ home contents policy when you should have taken out £60,000-worth and you make a claim for a stolen or damaged £2,000 musical instrument.

Because you are just 50% covered, your insurer would, perfectly reasonably, apply its averaging clause and pay you £1,000 when you were expecting double this amount.

If you’ve deliberately undervalued your contents, the insurer, who has underwritten you on good faith with no physical checking, has a right to reject the whole claim, in certain circumstances.

With that chunky caution out of the way, let’s take a look at valuing new-for-old contents insurance.

What does new-for-old mean?

If you lose everything, in a house fire for example, you will have to buy everything back in one hit, there and then. You can’t wait for a sale or discount. So you need to value all the items you own at what they would cost to replace immediately, not what you paid for them.

You also need to remember what is covered under your home contents insurance. Everything that’s not built in to the fabric of your home needs to be accounted for – the carpet and curtains, for example, plus your wardrobes and all the clothes in them.

How do you do this? Some insurance companies have content calculators to whip through your valuables, quickly and accurately. But be realistic about the replacement cost of everything you value, allowing for inflation and VAT rises.

Think about:

  • Pictures and frames you have on the wall, clocks, ornaments, trinkets
  • CD and vinyl collections, Blue Rays and DVDs, books, albums
  • Kitchen crockery, cutlery and glassware
  • White goods including washing machine, dishwasher, fridge, freezer, tumble drier
  • Tools, power tools, garden equipment, garage or workshop items
  • Beds, bedding, pillows, cushions, spare bed linen
  • Furniture, electrical goods, computers, gadgets, routers and cables
  • Musical instruments, sports gear, hobby equipment
  • Shoes, boots, hats, coats, scarves, gloves
  • The junk drawer, the cupboard under the stairs, storage below the kitchen sink, What’s under the bead and on top of the wardrobes, the basement, everything in the loft

It will soon add up to much more than you think. Remember, it’s not what it’s worth on eBay but what it would cost to replace at short notice, paying the full retail price.

Before getting stuck in, bear in mind that there are three types of contents insurance – bedroom rated, sum insured and unlimited sum insured.

  • A bedroom-rated policy takes the number of bedrooms in your property and extrapolates values from there. It’s a little rough-and-ready and may leave you a little, in some cases, over-insured. But it’s a good broad-brush approach for some people
  • A total sum insured is what is says on the box: the total value of all your contents and possessions
  • An unlimited sum covers all of your contents in one fell swoop with no limit – and no worry of being under-insured. Easy, but potentially expensive

What about insuring high value, single items?

There may be minor differences in how insurers tweak their formulas for assessing your valuables. Many insurance companies won’t go beyond £1,500 for some single items.

So check and put it in writing if there’s a specific item you want covered – high value jewellery, antiques, works of art, computers, gadgets or camera equipment, for example.

You might also want to consider which items are ‘all-risk’, which means they would be covered outside the home, such as if you went on holiday. You might want include a tablet or camera for example.

Updating your contents amount

Charlotte Halkett, managing director of digital app insurance company Buzzvault, told Moneysupermarket.com that some insurance companies don’t do enough to encourage customers to update their home valuables – especially the case at Christmas.

Too many people “renew their policy without updating their details based on the current value of what they own”, she says.

It is worth thinking whether you have increased the value of your contents before you renew your home contents insurance policy each year.

Three small-but-important points to remember:

  • Some items like clothing and bedding may not be covered by new for old – so check your policy
  • Remember there will usually be an excess to pay in any claim
  • It’s estimated almost seven million UK homes are under insured – don’t be one of them

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