How Underinsurance Could Cost Luxury Homeowners

For most households, arranging insurance is a box to tick. For owners of luxury homes, the figure on the schedule does more work than they realise — because when a claim comes, it is that figure, not the value of the house, that decides what gets paid.

Underinsurance is common among owners of high-value homes, and it is easy to miss. It rarely announces itself. The policy renews, the premium looks reasonable, and nothing appears to be wrong until a claim is made against a sum insured that stopped being accurate several years ago.

If you own a high-value home, a listed building, a second home or a portfolio, underinsurance is worth understanding — and it is straightforward to fix once you know where you stand.

What Is Underinsurance?

Underinsurance occurs when the sum insured is lower than what it would actually cost to rebuild the property or replace the contents.

It usually happens because:

• The rebuild cost was underestimated at the outset
• Valuable possessions were never declared
• Home improvements were not disclosed
• Collections have grown since the policy was arranged
• Policy limits have not been reviewed for years
• A standard policy is being used for a property it was not designed for

Two of those are different failures with different consequences, and they are worth separating. Insuring for too little is a valuation problem, and average is the remedy insurers apply. Not telling the insurer something material — an extension, a letting, a claim, a conversion — is a disclosure problem, and the remedies available to insurers under the Insurance Act 2015 and the Consumer Insurance (Disclosure and Representations) Act 2012 are different again, and potentially more serious.

Why Luxury Homes Are More Exposed

High-value homes frequently contain the things that are hardest to price and slowest to replace:

• Unique architectural features
• Specialist construction materials
• Bespoke interiors and joinery
• Fine art, jewellery and collections
• High-value contents

All of them raise the cost of rebuilding or replacing what was lost, and none of them are captured well by a general rebuild calculator or a standard contents limit.

Rebuild Cost, Not Market Value

The most common cause of underinsurance is confusion between market value and rebuild cost.

Market value is what a buyer would pay. Insurance is concerned with the rebuild cost — the amount required to reconstruct the property after a major loss. That figure includes demolition, debris removal, professional fees, planning requirements, specialist craftsmanship and the restoration of features that cannot simply be bought off a shelf.

On some properties the rebuild cost exceeds the market value outright — a listed building in a modest location being the clearest example. Owners who set the sum insured from a purchase price or an old valuation are frequently underinsured without knowing it.

Our guide to calculating house rebuilding costs sets out what a rebuild figure should include and when a surveyor's assessment is needed.

How the Average Clause Works

Most household policies contain a condition of average.

Where it applies and the property is underinsured, the insurer may pay only the proportion of the claim that your sum insured bears to the property's correct rebuild cost. Insured for 75%, you are paid 75% — the payment is reduced to that proportion, not reduced by it.

Example

A property has a rebuild cost of £2 million. The policy provides £1.5 million of cover, so it is insured for 75% of its rebuild cost.

A fire causes £200,000 of damage. Applying average, the insurer may pay 75% of the claim: £150,000, leaving the owner to find the remaining £50,000.

The shortfall applies to every claim, not just a total loss. A £20,000 escape of water claim on the same policy pays £15,000.

Whether average applies to your policy, and on what basis, depends on the wording — it is not uniform across the market, and it is one of the things worth establishing before a claim rather than during one. Ask your broker to confirm what your buildings section actually says.

Valuable Possessions Are Often Overlooked

Property is only half of it. Fine art, jewellery, watches, antiques, designer furniture and collections accumulate quietly, and standard policies impose limits on single articles and on categories of valuables.

Collections grow past those limits without anyone noticing, because nothing prompts a review. Items above the single-article limit generally need to be specified individually, and specifying them usually requires an up-to-date valuation — jewellery and watches in particular have moved sharply enough in recent years that a valuation from a decade ago is not a useful document.

The same limits apply away from the home. Where possessions travel — between properties, or abroad — worldwide cover and the limits that attach to it need checking rather than assuming.

Where Standard Policies Run Out

Standard household policies are built for standard households. On a high-value home the common restrictions are:

• Lower single-article and total limits for valuables
• Restricted contents cover
• Alternative accommodation limits set for a typical family home
• Narrower policy wording with less discretion
• Limited cover for possessions away from the property
• Exclusions relating to specialist features and non-standard construction

Alternative accommodation is worth a specific look. If a large or unusual house becomes uninhabitable, comparable temporary accommodation is expensive and can be needed for a long time — reinstating a listed or heavily bespoke property is measured in years, not months. Alternative accommodation limits vary widely between policies, and are often expressed as a percentage of the buildings sum insured, so an inadequate buildings figure quietly caps the accommodation cover too. Check the limit and the period against how long your house would realistically take to rebuild.

Multiple Properties Add Complexity

Owners of high-value homes often hold a main residence alongside holiday homes, second homes and investment property. Run across separate policies with different renewal dates, insurers and wordings, the gaps appear at the joins — an item covered at one address and not at another, or a possession in transit between them covered by neither.

Some specialist insurers will cover several properties on one policy, which removes the joins and gives one renewal conversation instead of four.

Listed Buildings Need Particular Attention

Listed buildings carry the largest underinsurance risk of all. Repair and reinstatement involve specialist materials, heritage requirements, skilled craftsmen, listed building consent and conservation constraints on method.

Restoration costs are consequently much higher than for conventional properties of the same size, and rebuild figures produced by general calculators are of no use. A reinstatement cost assessment by a chartered surveyor with heritage experience is the right basis.

What High-Value Home Insurance Does Differently

High-value home insurance is written for these properties. Policies commonly provide:

• Higher and more flexible limits
• Wider policy wording
• Cover for possessions worldwide
• Proper treatment of fine art and collections
• More realistic alternative accommodation provision
• Several properties on one policy
• Claims handling by people who deal with these losses routinely

The point is not that the cover is more generous in the abstract. It is that the limits and the wording are set for the kind of house you actually own.

Review It Regularly

Most people arrange insurance and then leave it alone. Circumstances do not stay still — you buy things, you renovate, you acquire art, you buy another property.

A review at each renewal, and a proper reinstatement assessment every few years, keeps the sum insured aligned with the property. It is the cheapest thing on this page and it is the one that prevents the problem.

Getting Professional Advice

Choosing the right protection takes more than comparing premiums. It is worth working with people who deal with high-value homes regularly and can assess:

• The rebuild cost, properly assessed
• Contents values and single high-value items
• Valuations, and when they were last done
• Risks specific to the property and its construction
• Appropriate limits, including alternative accommodation
• Which insurers will write the risk on sensible terms

Speak to Ellis David About Your Home

Underinsurance is one of the more common problems we see on high-value homes, and it usually only surfaces at claim — when inaccurate rebuild costs, thin contents limits and inadequate alternative accommodation provision all arrive at once.

Ellis David has arranged private client insurance from Essex Road in Islington for around 50 years. We hold agencies with more than 100 UK insurers and MGAs, including the specialists who write high-value homes, listed buildings, fine art and collections, and our team brings over 150 years of combined broking experience.

Contact us for a no-obligation conversation about your cover. We will look at your sums insured, tell you plainly whether they still stand up, and explain how bespoke high-value home cover can be built around your property and your possessions.

Read next: high-net-worth insurance · high-net-worth home insurance · how to calculate house rebuilding costs

This article is general information, not a personal recommendation. All cover is subject to the terms, conditions, limits and exclusions of the policy. Ellis David Ltd is authorised and regulated by the Financial Conduct Authority, register number 442066.