Insurance policies have always contained an “underinsurance” clause, which stipulates that you must set your Sums Insured at the full value of the relevant item, and if you fail to do so, the insurer can reduce any claim in proportion to the degree of underinsurance. For example, if you set the sum insured at 60% of the correct value, the insurer is only receiving 60% of the correct premium and would therefore only pay 60% of the claim. This is known as the “Condition of Average” and is a well established principle in insurance law. Whilst inflation has been relatively low since the end of the last century, we are now in a period of the highest inflation since the 1970s, and it is therefore more important than ever to review your sums insured to ensure they keep place with inflated replacement costs.
As most property policies are written on a “new for old basis” the sums insured should represent the replacement cost of the items for an equivalent new product, or in the case of Buildings, the cost to fully rebuild the property to a condition equivalent to when it was new, including demolition and site clearance; all professional fees; full rebuilding; any changes necessary to comply with current legislation; and all applicable taxes. It is important to remember that the rebuilding cost of a building does not bear any relationship to the market value.
Aviva have produced a very useful guide to underinsurance, although this is not specific to their policyholders and applies across the insurance market generally. You can read a copy of the document here. We would suggest that you take a few minutes to read the document and consider whether your sums insured are adequate. If not, we would be more than happy to discuss this with you to ensure you have sufficient cover for your ongoing protection.