Why under-insuring your home could cost you thousands of euro

When was the last time you checked how much your home is insured for? And did you check this against current rebuild costs?

Inflation across the building supplies and construction sectors means that rebuild costs have rocketed in recent years. Aviva, for example, has estimated that rebuild costs have increased by up to 40 per cent in some areas in recent years.

There are growing fears that as many as one in six home insurance policyholders across the State are underinsured, meaning that if they are faced with a claim, they may have to pay a substantial portion of the costs from their own pockets.

On the one hand, it’s easy to be cynical; insurers saying we should boost our cover and thus boost the cost of our premiums. On the other hand however, it’s not a pleasant experience for something to go wrong in your home to find out that you’re not fully covered for the cost of it.

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Rising costs

If you want to know just how much costs have risen in recent years, compare the Society of Chartered Surveyors of Ireland’s (SCSI) latest report on rebuild costs for September 2022, with one published back in 2016.

In the 2016 report for example, the SCSI put the rebuild costs for the average three-bed semidetached house at €181,071 in Dublin; €142,197 in Cork; €140,151 in Galway; €138,105 in Limerick; and €117,645 in the northwest.

In its most recent report however, the costs have soared.

In Dublin for example, the typical cost is now €268,030, an increase of some 48 per cent; while costs have increased by about 60 per cent across Cork, Limerick and Galway. The biggest increase, however, has been in the northwest, where costs rocketed by about 70 per cent to €201,390.

So, while costs have risen substantially across the board, it is those in the northwest that are perhaps most at risk of being underinsured, unless they have regularly checked their rebuild costs.

What is underinsurance?

Such a sharp increase in costs means that some homeowners will be at risk for not being sufficiently insured.

Typically, we only check our home insurance policy once a year at renewal time, but even then it is usually more about checking the price rather than doing the sums to see that we are adequately insured. What we should be doing is assessing separately whether our buildings cover is high enough to fully fund the cost of rebuild if required and also looking at our contents cover.

Underinsurance arises when the amount a property is insured for is less than the amount it would cost to rebuild or replace the property. So, for example, a home is insured for €200,000 before contents, but based on current prices, it would cost closer to €300,000 to rebuild. Remember, the amount a property is insured for is not the same as how much it would cost to buy the property – that is the valuation or market price, which is typically higher than the rebuild cost.

If your property is underinsured, it may leave you at risk should you need to make a claim, as you won’t be covered for the full amount.

Last September, the Central Bank found “increasing levels of underinsurance in the home insurance market”, noting that it had increased from 6.5 per cent in 2017 to 16.5 per cent in 2022.

But an even more striking statistic perhaps is that, of those who had their claim reduced due to underinsurance, the average reduction in the claim payment was about 19 per cent in 2021. That is a substantial shortfall for those who need to make a claim, indicating that they would have to fund about a fifth of the repair costs themselves.

The regulator subsequently wrote to insurers, asking them to get in touch with their customers on the issue and, as a result, most people with home insurance will have received a letter from their insurer on the matter. But did people act on these letters?

When asked how the situation has been since then, the regulator said it doesn’t routinely publish data on underinsurance and, while it is “monitoring the matter” and will revert to it, it couldn’t offer an insight at present. Insurer Aviva, however, said recently that the response to its letters had been “low” and said it is seeing evidence of underinsurance in about 16 per cent of claims received to date.

“We expect that this figure will continue to rise unless action is taken,” said Billy Shannon, personal lines managing director with Aviva.

Brokers Ireland also says the issue has become more urgent “as a result of rising inflation and other global factors”.

“The issue has likely deteriorated since [the Central Bank report], bearing in mind the strong inflationary environment and the impact that this has had,” says Cathie Shannon, director of general insurance at Brokers Ireland. “Costs have soared particularly with the Russian invasion of Ukraine.

“Anyone who has not reviewed their insurance cover would be well advised to do so and keep a close eye on it on an ongoing basis. We are seeing increases in manufacturing costs, in commodity prices, in the cost of finished goods, as well as a host of other costs.”

Not everyone who hasn’t increased their rebuild costs in recent years will be at risk of underinsurance, as some policies are indexed, which means that the amount you are insured for increases in line with inflation. That could be one solution to the issue.

“This is not universally the case and it may also depend on policy wording,” says Shannon, also noting that for index-linking to work effectively, the rebuild value must be correct at the start of the policy.

Watch out for the average clause

Being underinsured can bite even when you’re not making a claim for the full amount. Let’s say your home has been insured for €150,000 rebuild, but as the true cost is now closer to €300,000 your home is only 50 per cent insured.

So, this means that if you need to make a claim for €50,000, even though you have total cover of €150,000, the so-called average clause will kick in, which means you’ll only be eligible to claim back €25,000 – leaving you with a shortfall of €25,000.

The average clause is a condition of most home insurance policies, and means that the insurer will proportionately reduce the amount it pays out, if there is a difference between how much the property or asset is insured for, and the actual value.

If you suspect that your home insurance policy has not kept pace with price trends, it’s time to review. A useful tool here is the aforementioned SCSI house rebuild calculator. It will give you typical rebuild costs across the State for a selection of property types.

In general, it’s recommended that each time you renew your policy you consider your level of cover, for buildings and contents. Each time you should assess whether you have done any recent home improvements, such as an extension or new kitchen or bathroom.

Jonathan Hehir, managing director of Insuremyhouse.ie, suggests that when calculating the base rates for rebuilding, it’s important to be aware that costs are calculated on a total loss situation, eg the building has been destroyed and has to be demolished, the site cleared, and the house completely rebuilt.

What about the contents? Hehir says the rebuild cost does not include contents such as carpets, curtains, furniture, and white goods and appliances as well as other more personal items. “These are covered under the contents section of the insurance policy,” he says.

But will you have to pay more if your rebuild costs increase? In short, yes.

However, Hehir says while you might have to pay more, if your rebuild costs increase by 35 per cent – “and sometimes more”- it won’t be a similar increase in your policy. “Luckily, the premiums don’t necessarily increase in proportion to the sums insured,” he says.