Underinsurance: when the policy looks fine on paper
The sum insured stays the same for years. Rebuilding costs do not. That gap shows up as a halved payout.
Home insurance is the contract you sign once and then only pay. The renewal letter gets skimmed, the premium creeps up, everything seems in order. Meanwhile the policy is quietly drifting away from reality.
What underinsurance means
The policy contains a sum insured: what it would cost to rebuild the property. If that figure is lower than the real rebuilding cost, the insurer pays proportionally. It does not deduct the difference — it scales the payout.
An example for the order of magnitude: if the policy says 300,000 but rebuilding would cost 600,000, then on a 40,000 water damage claim you receive roughly half. The claim is far below the sum insured — that is not what the reduction depends on.
Why it drifts for almost everyone
Two reasons. Construction costs rise, so a figure set five years ago simply buys less today. And the one that gets discussed less: you increased the value yourself. You converted the loft, replaced the windows, redid the bathroom — and none of it appears in the policy.
Fifteen minutes a year
Once a year, around the renewal, walk through three questions:
- What would it cost to rebuild today? Not the market price, not what you paid — the construction cost. Rate per square metre times floor area, at today’s level.
- Was there any value-adding work in the last year? If so, has it been declared?
- Is the contents figure realistic? This is the one nobody touches for years, even though furniture and electronics turn over.
If you keep a list of your renovations with invoices, those fifteen minutes become five, and they run on real figures instead of guesses. That is the other benefit of documenting: after a claim you do not have to argue that the fitted kitchen was in fact fitted.
What landlords should check separately
A rented property is a different risk. Many policies treat it separately, and cover usually does not extend to the tenant’s belongings — that needs their own policy. Worth mentioning in the tenancy agreement, because tenants often assume yours covers them.
One more detail that can cost a lot: if the policy is written for residential use but you let the place short-term, that normally has to be declared. It is the first thing asked after a claim.
Settlement rules differ by insurer and product. This article gives you the questions; your policy wording gives the answers.