What is overinsurance and underinsurance?

Being over or under insured can cost you big money, but in very different ways …

As the economic climate begins to slowly improve, now has never been a better time to check if your home is either under or over insured. If you haven’t changed the building sums on your Home Insurance policy for many years, it is quite likely you are over insured.
Similarly, If you have revised your sums downwards in light of falling house prices without considering proper advice, you may be at risk of being under insured. Such policy holders are either spending more than is necessary on cover or risk losing a lot of money when they need it most.

Overinsurance

Overinsurance occurs when a policy holder insures their home for more that the cost needed to rebuild it. This is a waste of money on two fronts. Insurers are only obliged to pay out a maximum claim equal to the rebuild cost of the property.
In simple terms, you would be able to ‘profit’ from it in the form of an increased payout. Moreover, over insuring unnecessarily increases your annual insurance premium for no extra benefit.

Underinsurance

Underinsurance is the opposite of overinsurance. This is when the building sums of a Home Insurance policy is less than the insured property’s rebuild cost. Although the premiums of under insured policies are lower, such policy holders are putting themselves at risk of serious financial loss.
This is due to the average clause should any policy holder have to claim. The average clause reduces the amount of a claim by the percentage difference between the rebuild cost and the sums insured. Let’s use an example to demonstrate how this would work.
Mr. X has to claim for €20,000 damages to his home. He insured his house for €80,000. However, he then finds out that the rebuild cost of his home was actually €100,000. He would only get 80% (€80,000 / €100,000 * 100%) of the claim amount (€16,000) and not the whole €20,000.

How do you get it right then?

You really can’t beat getting advice from a good insurance broker on what is the right amount of cover for your home. Indeed, we wrote a post specifically on building sums a few weeks ago. If you are in the process of shopping around for cover, take the opportunity to ask an agent about your building sums – it could save you a lot of money.