Everything You Need to Know About Underinsurance in Home Insurance

Posted on: Apr 26, 2023 | 3 mins | Written by: HDFC ERGO Team

Everything You Need to Know About Underinsurance in Home Insurance

Our home is our safe place, and no other place in the world can give us the same peace and happiness as it does. There is nothing that can replace the emotional connection with the home, so it is our responsibility to protect the house and its contents. Though we all try and take all precautions to keep everything safe, having homeowners insurance is essential. This will take care of all the financial implications and help in repairing and replacing the damaged or stolen items in case of an untoward incident, like a natural calamity, theft or burglary.

The best home insurance policy is one that has adequate coverage and an appropriate sum insured. This should be for both the structure and contents. With less coverage, some perils might not be covered. Having the correct sum insured is also important, else you will unnecessarily pay an extra premium, and if the sum insured is less, the issue of underinsurance will come up, which will have an effect at the time of a claim. Let us understand the meaning of underinsured and how it will impact a claim.

Getting started – What is underinsurance?

Let us understand what underinsurance is and what it implies. When the house and its contents under property insurance are underinsured, the repair or the replacement is difficult, and the insured will end up paying from his own pocket, which beats the whole purpose of buying insurance. The claim is settled as per the sum insured of the item, which is around the replacement cost of the same model. Thus, if the sum insured is less, then the surveyor will settle the loss at a lesser value, and the amount you get from the insured company will be less.

Reasons for being underinsured

There can be many reasons for being underinsured. Some of them are:

1. Save premium by reducing the sum insured,

2. Agents selling policies for their commissions and not taking care of your needs,

3. Buying the wrong homeowners' insurance policy, and

4. Wrong calculation of replacement or repair cost.

How to avoid home underinsurance?

Once you understand underinsurance, you will realise that it is important to ensure to avoid being underinsured.

1. You should include the complete cost of building the property again if something were to happen. The market value is different from this amount as there is inflation also, which needs to be accounted for as well. Also, the market value is the amount that the house will sell for.

2. The sum insured of the contents should also account for inflation as the replacement and repair cost of the items will change in a few years.

3. Lastly, at the time of renewal every year, you must review the sum insured to ensure that the cost of items, if needed to repair or replace, will be covered.

How does it affect claim settlement?

When we all take insurance, it is for the time when we need financial help to replace or renew our items. The best home insurance policy is one which does not have a financial impact on the insured, and all expenses are taken care of by the insurance company. But if the insurance does not pay the amount that is needed to replace or repair the house and its contents, the main purpose gets defeated.

The way the claim settlement works is that the loss assessor assigned by the insurance company will assess the loss after checking the coverage and other aspects like depreciation, usage, etc. After doing all this, the base figure that he will use will be the sum insured. This implies that at this stage, if he feels there is underinsurance, his calculation will not be accurate.

The insurance company can use the average clause in this case. This clause sets a limit to the insurer’s liability to the total loss, which will be in proportion to the uncovered and covered sum insured. Thus, for a partial loss, the insurance company will use the formula to calculate the loss proportionately, and thus, you will be paid less, and the rest of the amount will have to be borne by the insured.

Thus, if the insured is underinsured and has to file a claim, he is bound to bear economic losses. If the sum insured were deliberately chosen less to avoid paying an extra premium, the loss at the time of a claim here would be much more than the amount saved in the premium. Therefore, while taking property insurance , the insured must choose the sum insured in a way that covers the following:

1. The present market value of the house and its contents, and

2. The value of reinstating the asset

Thus, you need to be careful and choose your sum insured carefully. The main issue is that many people in India do not understand the underinsured meaning and how it can affect them.

Conclusion

Underinsurance seems to be not too much of a worry for people till they do not realise how it has affected them at the time of a claim. Thus, being underinsured is not a good thing, and one should choose the sum insured wisely after taking into account all factors. Always take a good home insurance policy that has the right coverage and the sum insured. This will make sure there is no problem at the time of claim settlement, and there is no possibility of bearing any economic loss or financial strain. With a proper policy, you can ensure the financial burden is taken care of by the insurance company, and you can take care of the rest of things.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

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