Author: James Peake
This is by no means an isolated circumstance: we believe underinsurance is rife within the contents insurance market. The average clause is a standard UK policy term to protect against inaccurate value declaration; it states the policyholder must bear a portion of any loss if assets were insured for less than their full replacement value. Therefore, if an insurer finds a person has taken out inadequate insurance, it will reduce the settlement by the same percentage that the assets were underinsured by. Put simply, if an asset was underinsured by 40%, the insurer may only pay 60% of the claim.
However, the policies offered by Gallagher’s private client panel do not include the average clause. While this is great news for clients, it certainly does not negate the need for adequate insurance coverage. In the event of a loss, if a client is underinsured, the claim still won’t reflect the true value of their assets, and therefore, they're not going to be indemnified for the entire loss.
More worryingly, if the underinsurance is significant (the trigger is normally around 50%), the insurer could consider this reckless or deliberate misrepresentation by the policyholder. This would breach the duty of fair representation under the Insurance Act 2015, and the insurer would be within their rights to void the policy altogether. In this case, it will be as though the policy was never in force, and the policyholder will receive nothing. While this could be the case for any insurer, we visit the client under our proposition, offering advice to help ensure the sums are correct.
Why do people undervalue their contents?
When people consider contents insurance, they generally include televisions, technology, furniture, beds, carpets and curtains. However, that's where many households stop counting. In our experience, clothing, handbags, shoes and suits tend to be hugely underinsured. Alongside this, clients often forget to include the kitchen in their assessment – high-end dining sets, silverware, glasses, pots and pans and coffee machines can add £1,000s onto the value of their contents.
It is a myth that doubling the value of the contents will double the cost of insurance. Insurers have rate breaks throughout their data, and a higher sum will not always attract a hugely inflated price. The risk landscape for general contents is vastly different to that of property or jewellery. Houses are at risk of catastrophe events that can cause untold damage, while jewellery is worn out and about and risks being lost or stolen. Clearly, the contents of a house generally remain in one place.
The majority of claims insurers deal with are smaller attritional losses, so the rates for smaller sums insured are higher. As we mentioned earlier, the rates reduce for higher sums where the claims frequency reduces. Therefore, a client insuring their contents for £150,000 rather than £50,000 is unlikely to make a significant difference to their claim volumes. Consequently, it makes sense to value high-value items accurately.
Gallagher policies are written on a new-for-old basis1 . A dining room table and chairs that cost £4,000 four years ago may now cost £8,000 to be replaced like for like. Clients need to insure the replacement amount as a new item, not for how much the contents are currently worth. We advise clients to walk around their home with a piece of paper and add everything they would need to fill the house if it was empty.
Our private client specialists within Gallagher would be delighted to help you review your contents to understand what level of cover you may require. A number of insurers also carry out appraisals as part of their suite of services and offer free content appraisals. Ultimately you know how much you have spent on your contents, and it is worth spending some time to consider how much the inside of your home might be worth in the event of a claim. Please get in contact if you would like to discuss this matter further.