How to avoid underinsurance: A landlord’s guide

As a landlord, it is your responsibility to calculate and declare the value of your rental property to ensure that it is insured to its full rebuild value. Failure to do so could leave you in financial turmoil in the event of a fire, flood or other serious loss.

 

What is underinsurance?

If you insure your property for less than it is worth then it is underinsured, and in the event of a claim insurers will not pay the full amount.

Landlords who underinsure their rental property could potentially lose out on thousands of pounds worth of claims that could have been avoided. But instances of underinsurance are just as likely to be the result of confusion and lack of information as they are a deliberate route to a cheaper premium. 

 

How common is underinsurance?

It’s estimated that nine out of 10 properties in the UK are insured for the wrong amount with the vast majority (79 per cent) of them being underinsured for an average of 69 per cent of the amount they should be insured for. 

This means that, in the event of a claim being made for serious damage, the amount paid out is often significantly less than the property is actually worth. Indeed, landlords who underinsure their properties could potentially lose out on thousands of pounds worth of claims that might have been avoided. How would you be able to cope, for example, if you needed to find £45,000 for a £100,000 claim?

The latest data from RebuildCostASSESSMENT.com reveals that privately rented homes in Britain could be underinsured by as much as £315 billion, while for UK commercial property, the estimated underinsurance total is around £325 billion. 

These are truly staggering statistics that point to a UK wide problem which can only be resolved by landlords realising the risk they’re running and making sure their buildings are insured for the right amount.

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The true cost of underinsurance

To underline the consequences of underinsurance, let’s take an example from Hamilton Fraser Total Landlord Insurance’s recent archives. 

In November 2019, a tenant set fire to a property and there was extensive fire and smoke damage throughout. At the time of the claim, the property was insured for a rebuild cost of £88,000 but should have been insured for at least £124,000. 

This meant that the property was only insured for 71 per cent of its actual value. The fire claim amount was £35,414 but as a result of the underinsurance, the insurers applied the average and only 71 per cent of the claim was paid out, in the total amount of £24,894.

That’s £10,000 that could have gone towards rebuilding costs that the landlord will never see, which could be the difference between that landlord being able to bring that house back up to a liveable state or having to sell it on as a write-off. It’s a situation that could potentially trap owners of the thousands of underinsured properties in the UK right now and it begs the question – with so much to lose, why are so many landlords underinsured?

Is it a deliberate route to a cheaper premium or is it simply the result of general confusion and a lack of information? 

More importantly, what happens if you are underinsured and how might you get out from under it or avoid it entirely?

Why do landlords underinsure?

It’s a common misconception that landlords only underinsure properties as a means of chasing cheaper premiums. More often than not, it’s simply a case of understanding everything about the property, as well as its rebuild value and market value. Let’s start by breaking down the reasons why landlords might be underinsured.

Failure to take rebuild value into account

Buildings insurance works on the basis of rebuild value, as opposed to market value. If you insure your property for less than the rebuild value then it is underinsured. This would mean that in the event of a claim, insurers will not pay the full amount, they will apply what is known as ‘average’.

For example: a landlord insures their property for £100,000, and makes a claim a few months later for £50,000 following an accidental fire caused by the tenant. The insurer assesses the actual rebuild cost to be £200,000 therefore only 50 per cent of the actual value (£100,000/£200,000) is covered. In this scenario the insurer applies ‘average’ which means only 50 per cent of the £50,000 claim would be paid, leaving the landlord with £25,000.

Failure to take out specialist landlord insurance

If a tenant causes damage to a property for example, the landlord would not be able to make a claim unless they had taken out specialist buy to let insurance.

With a specialist policy in place, landlords can avoid any unnecessary financial loss should the worst-case scenario actually happen.

Failure to take loss of rent into account

If a landlord underestimates the time it will take to get the property back to a liveable or workable condition following an insurance claim, the loss of rent insurance may not cover a long enough period.

Failure to carry out regular valuations of the rental property

Carrying out improvements to your rental property such as adding an extension will increase the value of the property, but will also impact the insurance value too.

Similarly, a common underinsurance scenario occurs when a property owner simply renews their insurance policy year after year without making any updates that take market inflation into account.

Failure to get out of an underinsured policy

Getting out of an old underinsured policy before taking out a more practical specialist policy is often quite simple as long as you haven’t made any claims during the policy year. You might even find that you’re still in your ‘cooling off’ period. Note, however, that if you are not still within this period you might need to pay administration fees upon leaving.