Under-insurance
Under-insurance occurs when the sum insured on a policy is set below the true value of the item or property being covered. If a claim is made, the insurer may apply the average clause and pay only a proportionate share of the loss — not the full repair or replacement cost. Under-insurance is common in buildings cover where rebuild costs have risen faster than the insured amount.
How the average clause works
The average clause (condition of average) means your claim payout is reduced in proportion to how under-insured you are. For example, if your home is worth £400,000 to rebuild but you have insured it for £200,000 (50% of its true value), a £100,000 claim would be settled at 50% — leaving you with just £50,000. The shortfall comes directly out of your pocket.
The formula is: Claim payout = (Sum insured ÷ True value) × Loss. The further the sum insured falls below true value, the larger the shortfall at claim time.
Common causes of under-insurance
- Building costs inflation — rebuild costs have risen sharply; a sum insured set years ago may now be too low even if it was correct at inception.
- Home improvements — extensions, loft conversions, and kitchen renovations increase rebuild cost but are often not reported to the insurer.
- Contents accumulation — households acquire more possessions over time without updating the contents sum insured.
- Market value confusion — buildings should be insured at rebuild cost, not market value. These figures can differ by tens of thousands of pounds.
Use the RICS rebuild cost calculator or ask a surveyor to set an accurate figure. Review your sum insured annually or after any significant change. See also sum insured and our article on home rebuild costs and under-insurance.