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The Silent Risk of Property Under-Insurance

Growing inflation in recent years, particularly within the construction sector, has further contributed to a growing trend of under-insurance within the Irish property sector, and one that has been present for a number of years. A 2022 survey by the Central Bank of Ireland found that under-insurance across the home insurance market in Ireland had grown steadily in the 5-year period evaluated, from 6.5% in 2017 up to 16.5% in 2021.

For homeowners and landlords, under-insurance creates a potential risk of financial loss and financial stress due to potential reduced claim payments, in the event of an insurance claim, following partial or total loss to the property. It can also lead to longer settlement times due to longer negotiations, due to the shortfall in funds required to repair a property.

What is Under-Insurance?

Under-insurance occurs when the sum insured on your insurance policy is less than the rebuild cost of your property.    

What is the Impact of Under-Insurance for Irish property owners?

Many insurance policies will be subject to what is known as “the average clause,” which allows insurers to reduce the claims amount in proportion to the amount of under-insurance. 

This means that if your property is insured for less than its full reinstatement value, you may be liable for a portion of the rebuild, repair or replacement costs yourself, from your own funds (depending on the terms and conditions of your policy).

Real-Life Example:

A home has a rebuild cost of €400,00 but the insured amount is €300,000 – this means that you are only 75% insured and 25% under-insured.

  • In the event of partial damage to the property of €60,000 and subsequent claim to your insurance company, only €45,000 will be paid out.
  • In the event of total loss to your property, the maximum that would be paid out to you in the event of a claim would be €300,000 (as this is the amount the property has been insured for).

Causes of Under-Insurance

Underinsurance can be caused by a number of reasons:

  • Miscalculation of the rebuild or replacement cost.
  • No cover adjustment following property upgrades.
  • External factors such as rising material and construction labour costs.

Tips for Avoiding Under-insurance for Property Owners

  • Calculate the Full Rebuild Costs of your Property
  • To ensure adequate insurance coverage for your home or rental property, it is vital to conduct a comprehensive evaluation of the full rebuild cost of your property (as distinct from the market value of your property).
  • Online tools such as the House Rebuild Calculator provided by the Society of Chartered Surveyors Ireland (SCSI) can help you estimate the rebuild cost.
  • The rebuild cost should ideally include all relevant costs associated with the rebuild journey of your property, including architect’s fees and other professional fees, demolition fees etc., in addition to the actual construction and material costs of the rebuild itself.
  • If you have built-in kitchen units or wardrobes of fittings that are higher than ‘average-spec’, you must factor in this reinstalment cost to your estimate also.
  • Consider Obtaining a Professional Valuation
  • It is often prudent to obtain a professional valuation by a qualified chartered surveyor (RCA), especially for more bespoke or unique builds.
  • Review your Cover after any Changes or Upgrades to the Property
  • If you carry out upgrades to your property such as new rooms or an extension, it is important to review your level of cover at this point to avoid under-insurance.
  • Review rebuild costs through the calculator before each insurance policy renewal.
  • Don’t Neglect your Contents Cover
  • You should also review your level of contents cover on a regular basis and ensure you have sufficient cover for items to be replaced as new.
  • After purchasing new items such as laptops or home office equipment, you may need to reevaluate the level of cover needed.
  • Review your Policy Regularly
  • Finally, it is always wise to review your level of insurance cover (both buildings and contents) on a regular basis, ideally on an annual basis, particularly during inflationary periods when rebuild costs are rising.
  • Discuss inflation protection options such as policy index-linking with your insurance provider to ensure you have adequate built-in protections against inflation where possible.

For more information or to discuss your specific requirements, please reach out to the Herbert & Lansdowne team directly, who would be happy to assist.

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