Underinsurance – The underestimated problem

Picture the scene: a family safe, their property damaged, the chances of salvaging anything, limited. Is this the time to learn about underinsurance?

As a valuer who visits many properties, Alastair Meiklejon from Doerr Dallas Valuations has spoken to many disappointed homeowners who have discovered underinsurance too late. Below he talks about the underestimated problem of underinsurance and how it often happens.

So why does it happen?

Some haven’t thought about the problems of underinsurance, others may have chosen to ignore and some may simply not be aware of it.

A typical scenario is a homeowner re-models the interior of their property, with new curtains, carpets, furniture, and usually art and decorative items. They then use the figures they paid for these items to form part of the figures for their insurance policy. This is a good start – you would be surprised how many people still guess these figures or use the traditional ‘finger in the air’ valuation methodology.

A few years after the renovation of the property, times have changed – the cost of living has gone up, inflation, cost of materials and trades. Right now, we are experiencing one of the greatest periods of inflation in recent times and for want of a better explanation – things are far more expensive than they were three years ago.

The homeowner hasn’t updated their figures, so if they suffer a loss, they are looking at a significant shortfall in their policy. How this is dealt with differs from case to case, but the overwhelming stress that this would bring is never pleasant.

What could it cost?

A good example is as follows – I was part of the team assessing a large estate that had recently been inherited. The figures provided had been calculated in the mid-1990s, and index linked from that date, with a figure of around £250,000 for the entire contents of the property.

General contents of £200,000

Antiques and collectibles of £210,000

Silver of £101,000

Art/Paintings of £210,000

Total value = £721,000, nearly three times the index-linked figure provided.

In the event of a loss, some insurers will apply an ‘average’ clause. In the example above, the new estate owner would only receive around 35% of the current value to replace any loss. So if all art was lost, the owner would receive circa. £73,500.

Why is it important to value different categories?

The major part of the problem at the estate in the example revolved around the issue of a large general contents figure, which the owner believed would cover them. Not only does this give a skewed impression to the insurer, but also following a loss cannot describe the house contents accurately.

The main cause of issues revolves around certain items in the household;

Jewellery

In the last 10 years, the cost of remanufacturing jewellery has increased at an incredible rate. Some items cost two or three times more to manufacture with a rise in the cost of gold, diamonds and skilled labour all contributing to the wealth of underinsurance that we see. The bottom line is that if any jewellery has not been professionally valued in the last three years – it IS underinsured.

Art

The art world is as varied and fickle in value as it is in taste. Subsequently, paintings from 10 years ago that were perhaps bought locally, or not as investment pieces may have gone up in value. And contemporary artists such as Banksy and Stik have risen from almost throw away items to being worth hundreds of thousands of pounds.

Antiques

We all know the saying that ‘brown furniture isn’t worth anything’ well actually, this could not be further from the truth. The retail market for good quality 18th -19th century antique furniture, ceramics, or objet d’art is still strong with exceptional pieces still making prices higher than the supposed peak in the 1990s.

General contents

Without doubt, this is the greatest overlooked area and one that can be the most distressing. Yes, getting a painting correctly insured can certainly be an unpleasant experience. In most circumstances being underinsured on items such as technology, furniture, carpets, curtains, luggage, linens and other such items can be a far more shocking experience. This is where we have seen a significant rise in figures, especially over the last three years

When should you get a valuation?

The short answer is ‘regularly’ – depending on the type of item. When an item is purchased is the obvious time. But there are many other situations to consider as well such as making a will, or receiving inheritance. That ‘painting on the wall that grandad bought’ or ‘the pair of shotguns in the safe’ that may not be so tasteful, might be worth more than storing in the attic or throwing away. Gifts including an engagement ring should also be valued. These all present problems that need to be addressed before it’s too late.

*All data courtesy of Doerr Dallas Valuations
**Written by Ecclesiastical Insurance