The majority of homes in Britain are underinsured, according to analysis by a buildings insurance valuation firm.
Seven in 10 homes are currently underinsured, according to figures released by Rebuild Cost Assessment.
It means millions of homeowners don’t have sufficient cover to rebuild their property were it required.
Underinsurance is a major risk for homeowners, potentially leaving people unable to fully repair their property after a ‘worst case situation’ such as a fire or explosion.
The gap between insurance levels and true rebuild cost has widened in recent years due to construction inflation
The analysis also revealed homeowners who are underinsured, tend to be not even be close to the correct amount.
It says, of those homes that are underinsured, the buildings are covered up to just 63 per cent of the amount they should be on average.
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While underinsurance is a problem for the majority of households, the remainder of homeowners are more likely to be overinsured than to be insured at the right level.
The analysis revealed that 25 per cent of households are overinsured leaving just 5 per cent being insured at the right amount.
Johnny Thomson, of Rebuild Cost Assessment, said: ‘The gap between insurance levels and true rebuild cost has widened in recent years due to construction inflation and there are no signs yet that this gap is starting to close.
‘The way I see it, on every high street in Britain, roughly seven of every ten properties you’ll see will be underinsured. Around two will be overinsured and potentially only one will be covered for the right amount.
‘I believe everyone would agree that underinsurance remains unacceptably high.’
Anna McEntee, director at Compare the Market adds: ‘People may underinsure their homes accidentally by not valuing their home or possessions accurately enough when taking out an insurance policy. Others will do it deliberately to get a cheaper home insurance quote.
‘Either way, if you underinsure your home, you could end up disappointed if you ever need to claim.
‘The pay-out you receive might not be enough to replace your possessions or rebuild your property, forcing you to dig into your own pocket to pay for replacements or repairs yourself.’
Underestimating the rebuild cost
Although this is very much the worst case scenario, a property could need to be demolished and rebuilt from scratch following a fire, explosion, flood or storm.
This will include demolition and debris removal costs, new foundations, professional fees for planning and building regulations on top of all the building work required to rebuild the property, including driveways, boundary walls and outbuildings.
The total rebuild cost is different from the market value.
The market value – what someone will buy a property for on the open market – is typically more than the rebuild cost – albeit this will depend on the property.
The gap between rebuild and market value has narrowed in recent years thanks to higher inflation and a surge in the cost of building materials and labour.
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Get fully covered: Underinsurance is a big problem for homeowners, potentially leaving people unable to fully replace or repair their property
Chris Brown, senior carrier manager at insurer Ardonagh Group Holdings says: ‘Homes being underinsured is a serious problem. When homeowners underinsure, they risk not having sufficient coverage to rebuild or repair their home to its original state after a disaster.
‘This gap in coverage can leave homeowners facing significant financial hardship, as they may need to pay out of pocket for the shortfall.
‘Underinsurance typically arises when rebuild costs increase over time, and homeowners fail to adjust their policy limits to match these rising costs.
He adds: ‘The primary risk of underinsurance is financial. In the event of a major claim, such as fire, flood, or other natural disasters, if a home is underinsured, the insurance payout may not be enough to cover the full rebuild or repair costs.
‘Homeowners may be forced to cover the difference themselves, which could result in debt, loss of the property, or even bankruptcy.
‘Additionally, some insurance companies may apply penalties or reduce payouts proportionally if underinsurance is discovered, further exacerbating the financial strain. You should never underestimate the financial stress underinsurance can cause.’
How can homeowners check their rebuild cost is correct?
Homeowners can check their insurance policy to see what their rebuild cost is. It may also be labelled as ‘reinstatement cost’ or ‘declared value’.
There may also be a different figure for ‘total sum insured,’ which is typically higher than the rebuild cost as most insurers will add a percentage on top to factor in potential price rises over the 12 month cover period.
Changes in building costs in recent years means it is essential for homeowners to reassess the rebuild cost and total sum insured on their insurance policy each year to check they are adequately insured.
There are free online calculators available to estimate rebuild costs, but these are often general estimates and may not account for all the specific details of a home, such as unique architectural features, high-end materials, or local construction costs.
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The Building Cost Information Service (BCIS) produces a range of detailed guidance on the cost of rebuilding houses and flats.
It also provides a free online rebuilding cost calculator, which can be used four times in any 12 month period.
Chris Brown of Ardonagh Group Holdings says that while using such a calculator is better than just guessing, he suggests homeowners consider paying for an independent online valuation to be on the safe side.
‘While using online calculators can give homeowners a rough idea of whether their home is adequately insured, it may not always provide the precision required for full coverage.
‘Every homeowner should consider an official survey, especially if they have a complex or high-value property.
‘A professional Rebuild Cost Assessment involves a detailed survey by a qualified surveyor who can accurately calculate the specific rebuild costs based on factors like the size of the property, materials used, location, and labour costs.
‘According to Rebuild Cost Assessment, the cost for such a survey typically ranges from £200 to £1,000, depending on the complexity and size of the property.
‘While it is an added expense, it provides a reliable valuation that helps avoid the risks associated with underinsurance.’
Under insuring possessions
Homeowners also often overlook or undervalue their possessions within a home.
Artwork, record collections, garden ornaments, jewellery, watches and furniture are among the types of items often left underinsured, according to experts at insurer, NFU Mutual.
A recent survey of 1,000 affluent homeowners by NFU Mutual, found that just 21 per cent knew exactly how much it would cost to repair or replace their possessions, with 13 per cent again admitting to having no idea.
‘The cost to repair or replace an item can often be more than what you paid for it,’ says Dawn Blazier, head of bespoke Home Insurance at NFU Mutual.
‘An antique item of furniture, for example, may have been purchased for £200 several years ago but might cost £1,000 to replace like-for-like now.
‘Similarly, your old record collection, library or artwork may have increased in value significantly since you first bought it.
‘Even more modern pieces are likely to cost more to replace now than when they were purchased, and many people will have thousands of pounds worth of clothes without knowing it – even discounting rare and designer items.
‘I’d urge everyone to think about their possessions and contact their insurer if they think they might not have the cover they need.’