Underinsurance in home insurance complaints

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

• 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.