Overinsurance, Underinsurance and the Average Clause

The insurance industry is operating within a dynamic environment with global challenges such as the war in Ukraine, the continued impact of COVID-19 and climate change creating a backdrop of uncertainty. In an Irish context, rising inflation is having an impact on all areas of our businesses and lives.

Due to this rising inflation, costs for materials, energy, labour and other operational costs are increasing. These factors have an impact on the overall cost of rebuilds, repairs and claims which is reflected in home insurance premiums, however, the costs of repairs and materials are only some of the factors in the assessment of risk and calculation of home insurance premiums.

It is important to note that at renewal time your insurer or broker will issue you with a renewal notice at least 20 days before your renewal date and include the annual premium(s) paid for the policy in the previous five years. This gives consumers a good period of time to shop around for alternative cover. You can find detailed advice around home insurance and the benefits of shopping around in other sections of this website.

Over and Under-insurance

When it comes to over and under-insurance, it is important for you to insure for the building cover you need. The cover you need is the cost for rebuilding the home if it needs to be rebuilt, not the market value.

Using the market value of a property is not a good basis for valuation of the building sums to be insured as it includes the cost of the land, which is not appropriate for the purposes of rebuilding the property. The market value is also dependent on a range of external factors such as:

• housing availability and demand,

• mortgage interest rates,

• rent prices, and

• the area where the property is located.

If you use the market value of your home as the basis for valuation, you might be overinsuring your home and this could result in you paying a higher premium based on that fact. In this case, in the event of a claim, you would only receive the value to rebuild the property or the cost of the damage, not the market value.

You must also be conscious that, as mentioned above, rising inflation means that costs for materials, energy, labour and other operational costs are increasing. This could lead to an increase in the cost of rebuilding your home and result in the sum insured not representing the true value of the property insured. You should make sure that the amount covered by the insurance policy covers enough to completely rebuild the home and replace the contents of your home.

An example of under-insurance would be if your home is totally destroyed by fire and it is insured for €200,000, but the full rebuild cost is €250,000.

(€200,000 (Sum Insured) ÷ €250,000 (Rebuild Cost)) x €250,000 (Cost of Damage) = €200,000

You would be under-insured by €50,000 (or 20%) and your claim at the time of loss would be €200,000. Therefore you may only receive the claim value, but not the €50,000 the property was under-insured by.

We would encourage you to discuss any changes to the cost to rebuild the home with your insurer or broker when discussing your renewal and if you are shopping around with other providers. You should also note that the premium for a policy is reflective of the value you have the property insured for. Therefore, if you identify that your house is underinsured, and you make contact with your insurer or broker to amend your policy to reflect this, it may lead to an increase in your premium.

When it comes to over and under-insurance, it is important for you to insure for the building cover you need.

Learn more about under-insurance

The Average Clause

It is also important for you to check the Average Clause in your policy (all policies have an Average Clause- it’s a principle of insurance, like indemnity) and understand that this clause could affect the value of a claim in the event of partial damage if your home is underinsured.

An Average Clause usually states that if your building or contents sums are insured less than the full rebuild cost of the buildings or contents at the time loss or damage occurs, then claims settlements may be reduced. You will then be responsible for the remainder of the loss.

This means that if your home is insured for 80% of its rebuilding cost, in the event of a claim, your insurer will pay 80% of the agreed cost of the damage, if an Average Clause applies. For example, if fire damage costs €50,000 to repair and your home is insured for €200,000 but the full rebuild cost is €250,000 the following will apply:

(€200,000 (Sum Insured) ÷ €250,000 (Rebuild Cost)) x €50,000 (Cost of Damage) = €40,000

You would be underinsured by €50,000 (or 20%) and your claim at the time of loss would be €40,000.

We would encourage you to discuss the Average Clause in your policy with your insurer or broker when discussing your renewal and if you are shopping around with other providers and make sure that you fully understand what it means for you and your home insurance policy.