Does your Home Insurance Fall Short?

Does your home insurance fall short?

During a time when almost everyone is feeling the financial pinch of the credit crunch, the last thing homeowners need is for a minor disaster to occur that wipes out or severely damages their property. Unfortunately however, severe storms, heavy flooding and home fires do occur and while you can’t expect the unexpected you can at least prepare for it with a good home insurance policy.

However, findings from home insurance provider Norwich Union, soon to be rebranded as Aviva, have revealed that property owners may have to face these potentially huge costs without sufficient assistance because they are failing to insure their properties to the full reinstatement value.

The insurer sampled 128 valuations and revealed that 86 per cent of those properties were significantly underinsured to the collective total of £314 million.

Why is it important to use the correct sum on home insurance?

The only way to guarantee receiving the full amount in the event of a claim is to have accurate sums insured on the property. This applies to both buildings insurance, where you should insure to the full rebuild value of the property, and contents insurance with which you should ensure that all of the items you have bought most recently are accounted for within the policy limit.

According to Norwich Union, around 50 per cent of claims for damage to buildings are settled below the cost of reinstatement – meaning that property owners have to fund the difference themselves.

This problem has taken on added risk during the global economic crisis. With banks refusing to lend to each other, they are in turn tightening their criteria over consumer lending fearing more bad debts that were one of the key factors in the start of the credit crunch. So whereas in the past homeowners could take out a loan to meet the surplus cost, this is now a more limited option and a significant shortfall in the claim could leave the owner with no choice but to sell the property at a vastly reduced price.

How can you avoid under insurance on a home insurance policy?

The best way to avoid under insurance is to have a professional valuation carried out on a property. Do not rely on valuations for bank or sales purposes as they may not accurately reflect rebuilding costs.

Some property owners are falling into the trap of believing that because the retail prices of homes have slumped in the credit crunch, rebuilding costs will follow suit. There is a chance that rebuilding costs will come down as the construction industry has been hit hard making the industry more competitive in a bid to attract additional business. However, these savings are likely to be minimal and may even be wiped out by additional expenses elsewhere. So don’t assume you can adjust your sum insured downwards unless you’ve had a valuation carried out.

Remember that when insuring a building you are not just covering the bricks and mortar. You are also covering the replacement value of garages, outbuildings, fences, fixtures and fittings.

Will increasing your home insurance cover cost you more money?

Some homeowners are understandably reluctant to adjust the sum insured on their buildings insurance as they fear it will increase their annual home insurance premiums. This is a possibility, but it shouldn’t stop you from insuring your home correctly as failing to do so could be far more costly in the long run.

Instead homeowners should make sure they’re getting the best deal for their needs. Call your home insurer and ask it about discounts – if you let your insurer know that you are thinking of moving to another deal it may offer you a better rate.

Alternatively the insurer may recommend measures you can take that could slash your premiums. Increasing the security of your home could be one step – most insurers will offer premium reductions if you fit approved security systems such as burglar alarms, security cameras and time-switch lights. Joining a Neighborhood Watch scheme costs the homeowner nothing, but typically reduces premiums by around five per cent.

The risk of fire damage is high on the list of concerns for most insurers. So if you can limit the damage a fire would cause by installing smoke alarms and fire extinguishers or even reduce the chance of a fire occurring by quitting smoking then your home insurer should reward you with a discount.

Finally, make sure you’re getting a cheap home insurance deal that adequately covers your needs. You can compare policies online with a comparison website – most insurers offer cheaper deals to new customers so make the effort to shop around every year.