What is underinsurance and why am I being paid less?

Question

José Manuel Alburquerque · Accepted Answer

Underinsurance occurs when the sum insured in the policy is lower than the real value of what is insured. In that case the law allows the insurer to pay the loss in the same proportion. If rebuilding your home costs 200.000 euros and you have it insured for 100.000, on a loss of 20.000 euros you will be paid 10.000. This is the so-called proportional rule, which does not apply if the policy excludes it, as happens with first-loss cover. In addition, many home insurance policies allow a margin of difference without applying it. How it is calculated The sum insured is compared with what the property was worth immediately before the insured event. For buildings, policies usually take what it would cost to rebuild the home, excluding the land, not its market price. For contents, what counts is the value of the furniture, appliances, clothes and other items in the home. The proportion applies to any loss, however small. If the sum insured covers half the value, you will be paid half of each loss. When it does not apply or can be challenged If the policy is on a first-loss basis, the insurer pays the whole loss up to the sum insured. If the policy has a tolerance margin and the difference does not exceed it. The percentage varies from policy to policy. If the policy allows sums insured to be offset and a shortfall on buildings is matched by a surplus on contents, or vice versa. If the value of the property was set in the policy by mutual agreement. The insurer can only challenge it if there was deception or if, by mistake, that value is much higher than the real one. How to avoid it Review the sums insured at each renewal, especially after renovation work or major purchases. Also ask for the policy to be revalued automatically every year. If it was the insurer or its agent who set the sum after valuing the home, keep that valuation, because it will help you challenge the reduction. And if the rule is applied to you, ask in writing for the calculation and the valuation it is based on, so that you can challenge it with your own expert.