The danger of underinsuring your possessions

Financial Ombudsman warns of the problems that come from underinsurance.

The Financial Ombudsman Service (FOS) has highlighted the danger of underinsuring your possessions.

According to the Ombudsman, which can help if a financial firm doesn’t deal with your complaint to your satisfaction, one of the main issues with buildings and contents insurance claims arises from people being asked to give valuations of what their possessions are actually worth.

Too often they are only told that they are underinsured after they try to make a claim, by which time it can be too late.

It emphasised that it is crucial that insurers ask clear and straightforward questions of the person looking to take out insurance. Insurers will often ask “How much cover do you need?” on their application forms, when the actual question should be “What’s the total value of all the items in your house?”

And it warned that it is seeing a number of cases where advice given by insurers is misleading, which then results in the customer underinsuring their possessions, for example by steering people towards online valuation calculators without actually checking if the calculator is suitable for that customer.

Another example is where insurers pre-fill in parts of the form at renewal time, without making it clear that the customer needs to check the accuracy of that information.

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Why underinsurance is a problem

Insurers react in different ways when they discover underinsurance. Some simply pay the claim, but others elect to pay a reduced amount or even cancel the policy entirely.

The Ombudsman emphasised that it doesn’t see many problems arising when the insurers ask the right questions, which the customer is then able to answer accurately.

It also published a series of case studies to highlight the sort of cases it deals with, and the decisions it comes to.

Not asked a clear question

Miss F arranged insurance for her parents, who were later burgled. The cover in place was for up to £10,000 of ‘high value’ items, like jewellery. When the loss adjuster gathered evidence on what was stolen, he flagged up that the contents were considerably underinsured, with the value nearer £100,000.

The insurer decided that had they known the true cost of replacing everything, they would not have offered insurance in the first place, so voided the policy altogether.

The FOS upheld Miss F’s complaint, after reviewing the questions she had been asked when arranging the policy. It determined that the question around the level of cover required was sufficiently ambiguous that Miss F interpreted it as asking what the value was of the items she wanted to be insured, rather than the total value of all of the contents of the home being insured.

Because the question was not clear, and the insurer did not do enough to warn Miss F about the consequences of underinsurance, the insurer was told to reinstate the policy and reconsider the claim, as well as paying £200 compensation.

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Steered into using an unsuitable valuation calculator

When Mrs J renewed her home insurance, she was told that she would have to provide a valuation for her home. She was directed towards using a valuation calculator on a different company’s website.

A few months later a burst pipe caused severe damage. The loss adjuster reported that the property was substantially underinsured, perhaps by only 50% of its true value. As a result the insurer elected to pay the claim, but only proportionately because the property was so underinsured.

The Ombudsman upheld Mrs J’s complaint, after it discovered the calculator she had been told to use only allowed calculations on properties of up to four bedrooms, while Mrs J’s had six. It also didn’t ask about non-standard things, so the fact that Mrs J’s property was a listed building was not taken into account.

As the fault was the insurer’s, it was instructed to pay the difference between what she’d already received and what she would have got if she had been fully insured.

“Straightforward” insurance

Mr and Mrs Y wanted to take out contents insurance. They settled on an insurer, which presented them with three options for cover: £50,000 cover, either with or without accidental damage cover, or up to £25,000 cover with a deduction for wear and tear.

They weren’t sure what their possessions were worth, so elected to go for the highest level of cover.

The following year their house was flooded by a burst pipe. The loss adjuster realised there was well over £50,000 worth of damage to the contents of their home. Because they were underinsured, the insurer only offered Mr and Mrs Y £25,000, arguing that they had not disclosed the full value of their contents.

The FOS upheld this claim, noting that the policy brochure the Ys had been sent included the line “Our insurance removed this worry [underinsurance] for most people by automatically insuring you up to a maximum amount.”

The FOS said that as they had selected the highest level of cover, they were entitled to think they wouldn’t be hit by underinsurance. What’s more, none of the documentation from the insurer referred to the full cost of their possessions, instead simply offering the three levels of cover to choose from.

The insurer was instructed to reconsider the claim and pay £300 compensation.

For more on making a complaint to the Ombudsman, read our guide How to complain to the Financial Ombudsman Service.

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