Underinsurance occurs in buildings insurance when the property value you stated when you took out your policy (your property’s “sum insured”) is lower than its true professional rebuild cost. You can also be underinsured on other policies, such as contents. For businesses, it can also relate to policies for business interruption, machinery, stock etc. In the interest of simplicity, for the purpose of this article, we will generally reference buildings insurance as this applies to the majority policyholders (homeowners, business owners and landlords), however, bear in mind the rules apply to other policies also.
Underinsurance can become a critical risk because insurers view this as a breach of the policy terms and can trigger the “Average Clause” – a standard insurance penalty that reduces your claim by the same percentage you are underinsured.
Underinsurance doesn’t just apply to total losses, your insurer can legally reduce your payout proportionally, even for minor damage, leaving you to bridge the financial gap yourself.
Hypothetical examples of underinsurance
Example 1: Fire damage in an underinsured home
A homeowner insured their property for £300,000. After a major fire, the total rebuild was estimated at £400,000. The insurer applied the average clause and reduced the financial settlement by 25%, leaving the homeowner with a significant funding shortfall of £75,000.
Example 2: Partial claim still reduced
A storm causes £20,000 of damage to a roof. The rebuild cost of the property is £500,000, but the homeowner only insured it for £375,000. Because the property is 25% underinsured, the insurer will apply a 25% reduction penalty (£5,000), resulting in a settlement of only £15,000.
What is the average clause?
As mentioned above, the average clause is a term in many insurance policies that allows insurers to reduce your settlement relative to the level of underinsurance, meaning if you are 32% underinsured, your claim value will be reduced by 32%.
For example:
- You insure your home for £200,000
- The actual rebuild cost is £250,000
- You make a claim for £50,000
The insurer is entitled to apply the following:
- £50,000 × (200,000 ÷ 250,000) = £40,000
You would receive £40,000 instead of the full £50,000 and need to cover the rest yourself.
Underinsured vs uninsured: What’s the difference?
While they sound similar, being underinsured and uninsured mean very different things. One means you have some cover, but not enough, while the other means you have no cover at all for a particular loss. Here’s how they compare:
| Term | Meaning | Example |
| Underinsured | You have insurance, but not enough to cover the true rebuild cost | Home is insured for £200,000 but would in fact cost £300,000 to rebuild |
| Uninsured | You have no insurance cover for your home at all | Any incidents at your home will have to be paid for personally |
What causes underinsurance?
Underinsurance often happens by accident – not because people ignore their cover, but because they make assumptions, don’t consider value added to the property or miss key details.
Here are some common reasons underinsurance occurs:
- Relying on market value instead of rebuild cost
- Failing to update insurance after renovations or extensions
- Forgetting to review sums insured regularly
- Using generic online calculators without adjusting for location or special features
Checking for underinsurance
Underinsurance often goes unnoticed until a claim is made. By then, it’s too late to fix, and could cost you thousands. That’s why it is essential to review your policy alongside your rebuild value regularly, especially if your property has changed or building costs have risen. Consider the true, current cost to replace contents as well when the time comes to insure your contents each year.
Here are some simple steps to help reduce the risk of underinsurance:
- Review your sum insured approximately every 3 years, or after major works (e.g. extensions, renovations, loft conversions)
- Use a professional Rebuild Cost Assessment (RCA) for accurate valuations, especially for listed buildings or bespoke homes
- Try the BCIS/ABI rebuild cost calculator for a free estimate (suitable for standard homes only)
- Speak to a surveyor if you’re unsure whether your current cover is sufficient
Underinsurance warning
In cases of extreme underinsurance, an insurer can refuse to pay a claim altogether on the basis that the risk presented at the outset was not a true representation of facts.
If you are concerned you are underinsured and need to make a claim, you are welcome to speak to one of our experts for advice, free of charge.
FAQs
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How common is underinsurance?
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Underinsurance is very common in the UK. Multiple sources estimate that around 70–80 % of UK buildings are underinsured, which means the majority aren’t insured for enough to rebuild if disaster strikes. Those underinsured homes typically have cover for only about 60–65 % of what is actually needed to rebuild fully.
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Can I change my sum insured mid-policy?
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Yes, in most cases you can but it depends on your insurer. Most UK home insurance policies allow you to update the sum insured at any time, not just when your policy renews. If you’ve done home improvements or think your current cover is too low, contact your insurer or broker to update it right away. Just bear in mind that any claim will be assessed based on the amount that was covered at the time of loss, not any changes made afterward
