When taking out a home insurance policy, customers must take care to tell you the accurate value of the buildings or contents they want to insure – the ‘sum insured’. It’s also up to you make sure that you ask clear questions.
It can be difficult for people to calculate the value of their possessions and we don’t expect customers to be experts. So it’s stressful when you tell them they’ve underinsured themselves because they underestimated how much their possessions were worth. Customers are usually only told about this after they’ve claimed, by which time they’ve already suffered significant loss.
Types of complaint we see
In many insurance disputes we see, customers complain that insurers haven’t asked the right questions.
For example, we see application forms asking ‘how much cover do you need?’ when what you actually want to know is ‘what’s the total value of all the items in your home?’
Other examples of underinsurance complaints we investigate include:
- the insurer has tried to apply ‘average’ to a claim when there is no average clause in the policy
- the insurer didn’t make it clear that the customer needed to check the accuracy of all pre-filled parts of an online form about the sum insured
- the insurer applied the average clause, although they didn’t ask the customer to give an estimate of the full amount at risk
- the customer was careless in stating the sum insured on their application form, so the value isn’t accurate, but still seeks to claim
What we look at
Before offering cover, you’ll need to know the replacement cost of the contents of a property, the cost of rebuilding the property, or both. This is so that you can assess the risk you’re taking on before giving a quote.
But customers aren’t usually experienced in calculating these costs.
We’ll bear this in mind when considering complaints about underinsurance.
The information you asked for
If the information you gave was unclear, unfair or misleading and led the customer to underinsure their contents, we’ll find out what you asked the customer when they started or renewed their policy. We’ll try to understand what you asked for in:
Contents insurance policy applications
You could have asked a customer about valuing their contents in a number of ways, for example:
- ‘what’s the total value of contents held at your property?’
- ‘how much cover do you require?’
- ‘what sum insured do you require?’
The first question is asking about the total value of the items at risk in the property, while the other two simply ask how much the customer wants to insure.
Buildings insurance policy applications
There are different ways to ask a customer the same question on an application form about how much they want to insure their property for, for example:
- ‘amount to be insured – buildings’
- ‘buildings value: the value shown should be the present day rebuilding cost including debris removal; architects’, surveyors’ and consultants’ costs, legal fees and VAT; and the additional cost of complying with government requirements’
We’ll look at whether the question clearly asks for the information the insurer wants to know and how helpful it is for the customer, including:
- does it point the customer in the right direction to reach an accurate figure, for example, by referring to online calculators?
- does it say what must be included in the rebuild cost?
We’ll also need to assess any additional guidance you gave the customer for completing the application. We’ll ask:
- did you provide clear descriptions to help the customer value their contents or estimate the property’s rebuilding cost?
- was it clear that you were asking for the full replacement cost of the contents in the property?
- was it clear what you meant by contents?
- if the application was made online, would the customer have been unable to complete the application without reading any guidance notes?
If the answer to any of these questions is no, we probably won’t consider it fair for you to:
- apply average
- void the policy
- adjust the claim in other ways
Online tools to help the customer
Online tools can help customers, but we sometimes see cases where they’ve led to things going wrong.
For example, insurers sometimes refer customers to an online valuation calculator without checking if it’s suitable for that particular customer. Read a case study about this.
Some online application forms include pre-filled fields, which show pre-set sums insured for contents or buildings insurance policies. These are based on answers the customer gives to questions like ‘how many bedrooms does your property have?’
In this case, we’ll look at whether you’ve made it clear that the customer needed to check the accuracy of all pre-filled parts of the form about the sum insured.
The customer should have been advised to make sure the amount on the form would cover the full replacement cost of their contents or the total rebuild cost of their home.
If you've communicated in a way that’s clear, fair and not misleading, we may agree that it’s fair for you to apply the average clause. But we’ll balance this against any issues of misrepresentation under the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) to reach an outcome that we think is fair and reasonable.
In cases of underinsurance, you may choose to ‘apply average’ to the claim under a policy’s average clause.
This means that where the sum insured isn’t enough to cover the full cost of the claim, you can reduce your liability by applying a proportionate approach. There’s a formula you can use to work this out:
Sum insured is: true value at risk x loss = claim sum paid
Although average clauses are common in home insurance policies, not all policies have them.
We’ll usually decide it’s reasonable for you to apply the average clause if the customer was:
- asked to confirm the total replacement or rebuild cost
- given clear guidance on how to calculate those figures
- clearly told about the consequences of providing incorrect figures
If the consequences weren’t clearly explained and highlighted, we’re unlikely to decide that it was fair for you to rely on the average clause. But you could rely on the sum insured as a total limit or on specific limits if these were clearly pointed out.
We’ll usually say that it isn’t reasonable for you to apply the average clause if:
- you didn’t ask the customer to give an estimate of the full amount at risk
- you didn’t explain that you required this amount
In these cases, you should deal with the claim up to the policy limits in place, as long as you drew the limits to the customer's attention at the start of the policy or at renewal.
Unfair to apply average after insurer hadn’t asked for full contents value
Veronica and Mike own contents at their property which would cost £50,000 to replace if they were lost or stolen. But they wrote on their application that they only sought insurance cover of £30,000. They thought it was unlikely they’d suffer a loss of more than £30,000 in one insured event. We investigated, and found that the insurer hadn’t asked the customer to state the replacement cost of their entire contents. We didn’t think it was fair to apply the average clause on the basis that the customer didn’t disclose the full amount. Neither did we consider it fair to use misrepresentation or non-disclosure as a reason to void the policy or reduce the claim payment.
Other scenarios that we see when it comes to applying average include:
When there’s no average clause in the policy
To reduce the claim amount, insurers sometimes apply average to a claim where the customer is underinsured, even though the policy doesn’t contain an average clause.
We don’t think this is fair. Our approach is that where there’s no policy term, insurers can’t apply average.
If you didn’t ask a clear question or the customer estimated the value at risk to the best of their knowledge, we think it’s unfair for you to void the policy. In these cases we’ll usually tell you to settle a valid claim up to the stated sum insured or relevant policy limits.
Applying average clauses to policy limits
When there’s an average clause in the policy, we’ll usually expect average to be applied before any policy limit.
If the amount after applying the average clause is more than the policy limit, then we’re likely to only require you to pay the policy limit.
If the amount after average is less than the policy limit, then we’re likely to require you to pay the lower amount.
Market value fluctuation
We’re unlikely to uphold a complaint against you because you haven’t warned your customer that valuations can change over time. Gold, for example, costs more than it used to – it’s a customer's responsibility to make sure their gold items are fully insured.
Read a case study about this.
Index-linked sums insured
Under many policies, the sum insured is index-linked so that it’s adequate and in line with inflation. When we’re considering a complaint, we’ll check you’ve applied index-linking where appropriate.
And when customers renew policies, you should make it clear:
- that they must check the sums insured are still appropriate to the information you want to know about, for example: rebuild value, total contents or high value items
- the consequences of not reviewing sums insured
When the customer provides untrue or inadequate information
Customers have their part to play in providing the right information. They’re responsible, when asked, for giving the best estimate they reasonably can of the value of their contents. But sometimes, the customer hasn’t provided the right information. Here’s what we look at:
The customer didn’t disclose true costs
If you said that the customer failed to disclose the true replacement cost of their contents or the true rebuilding cost of their home you might then choose to void their policy from the start.
In other words, you might cancel the policy by refunding all premiums paid and possibly recover any money paid out under previous claims.
We’d look carefully at the circumstances of the case to decide if you've acted fairly and whether the customer failed to take reasonable care not to make a misrepresentation.
Qualifying misrepresentation – careless
Sometimes, the customer knew they needed to estimate the full replacement cost of their contents or the full rebuilding cost of their home but they still provided the wrong figure. You asked the customer a clear question but we consider that they didn’t take ‘reasonable care’ to answer it.
In these cases of ‘careless misrepresentation’, we’re likely to agree that you can settle the claim proportionately, taking into account the premium actually paid and the premium that should have been paid.
You’d need to make clear that you’d based your decision to settle in this way on a misrepresentation at the start of the contract.
We’ll usually support you if you suggest settling a claim proportionately, even if there’s no average clause in the policy.
There may also be situations where you would have attached conditions or endorsements to the policy if you’d known the true value at risk, for example, keeping items in a safe.
We’re unlikely to think it’s fair for you to retrospectively add conditions or endorsements to a policy unless we’re satisfied that:
- the customer was careless in incorrectly stating the sum insured or limits
- you would have added the conditions or endorsements if you’d known the true value at risk
We’ll also look at whether the customer's position has been ‘prejudiced’. This means whether they would have taken out the policy if it had included the extra conditions or endorsements from the start.
If we think they would have done, we’re likely to say no prejudice exists and you can assess the claim in the usual way as if the condition or endorsement was in force.
Read a case study about this.
Qualifying misrepresentation – deliberate
If the customer has deliberately or recklessly misrepresented the sum, we’re very likely to support you to:
- settle the claim proportionately
- not pay all of the claim
- void the policy in certain circumstances
There would need to be compelling evidence that the customer had, on the balance of probabilities, committed fraud, for example, evidence suggesting that the customer deliberately and significantly underinsured to obtain a lower premium.
Putting things right
We see a range of responses to underinsurance from insurers. Some pay the claim (and might also deduct any additional premium), some pay a reduced amount, and some insurers cancel the policy completely. We’ll look at the circumstances of each case and make a fair judgement based on the facts.
We may take the view that you should pay the claim in full, rather than settling it proportionately if:
- you didn’t ask the customer to tell you the cost of replacing all their contents
- you didn’t warn them of the consequences of underinsuring their contents
- your questions were unclear
Buildings insurance complaints would follow the same principles.
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