Underinsurance's actual economic impact

Quotes for contents insurance are a pain to fill out. How many of us can accurately estimate the worth of everything we own? It's human nature to undervalue one's possessions when filling out a survey that asks for an estimate of that number.

Maybe you don't see it as a big deal. If you understate the worth of your belongings, your premium will be reduced, and perhaps you won't have to make a claim.

But, if you end up needing to file a claim and you have inadequate coverage, you might face a number of complications.

So let me give you an example.

In your Auto Insurance, you state that the sum of all of your possessions is worth £200,000.

Your home burns down, and a Loss Adjuster determines that the worth of your belongings was £400,000 before the fire.

You probably deserve a £200,000 payout to replace your belongings. Not the best, but it was your fault.

It brings us to the second possible outcome.

An "Average Clause" is often used by insurers if a policyholder has underinsured their contents. When you under-insure, your payout will be lowered by that amount.

The payout in the above scenario is a mere £100,000.

Around half of the worth of your goods was missed by your calculations.

The payoff value is halved as a result.

You have been paying premiums on items worth £200,000, but you will only get £150,000.

In such a case, how do you check whether you have enough coverage? These are several details that are often disregarded:

Clothes, drapes, and rugs.

The first two are often disregarded because they are incorrectly believed to be covered by standard property insurance. Rugs should also be accounted for.

We tend to undervalue what we wear. It's always a good idea to calculate how much it would cost to replace your current wardrobe, even if you have no interest in designer brands or fancy purses.

Don't forget to itemize your precious jewelry on your coverage.

Lights — even without chandeliers, lampshades may be rather pricey.

Dinnerware, glassware, appliances, and pricey pots and pans fill the kitchen.

Large, costly products like furniture and electronics tend to stick out in people's minds, but the sum of the smaller purchases might be just as significant.

Would skyrocketing rates be a result of overinsuring your home's contents?

In most cases, no. Look at this recent client we assisted as an example.

We accepted a customer who had just £990,000 worth of contents insurance (that's under-insured; we do take care of certain sports stars who had more than the value of the average content). We were able to increase his amounts covered by almost £1 million for just £150 extra in premiums per year with the company we went with. This is only an example to illustrate that a larger policy limit does not always result in a correspondingly higher premium.

In the event of a claim, this customer would have lost a substantial amount of money with his former broker due to the Average Clause.

Our customers fall into the "High Net Worth" category, and the plans we select for them seldom, if ever, feature the "Average Clause" provision. Even so, we often go to the client's house or have a lengthy phone conversation to determine the worth.