Consumer complains about impact of underinsurance

Buildings insurance

When Barry made a claim on his buildings insurance following an escape of water, he was unhappy the insurer only agreed to cover 50% of his claim.

What happened 

Barry took out a buildings insurance policy to cover his home. Six months later there was an escape of water that caused damage to a number of the rooms.

He made a claim on his policy and the insurer sent a loss adjuster to inspect the damage. The insurer agreed to cover the claim but it raised concerns about the property being underinsured. It said Barry had said the rebuild cost of the property would be £400,000 whereas its loss adjuster said this would be £800,000.

It said this meant it would apply the average clause in the policy and would settle the claim at 50% of the full value – as this was the proportion Barry was underinsured by.

Barry didn’t think this was fair and made a complaint to the insurer. He said he had worked out the cost based on how much his neighbour had bought their house in previous year. So he thought this was an accurate valuation.

The insurer said in its final response that it won’t change its position, so Barry contacted us to investigate his complaint.

What we said

We looked at the question Barry had been asked when he took out the policy. This said ‘what would it cost to rebuild your property in full including demolition and debris removal?’ The insurer’s website also had a link to an online calculator to assist in providing the estimate.

We asked Barry how he came to his estimate of £400,000, he said he hadn’t used the calculator as he isn’t very good with computers. But he’d spoken to his neighbour recently about how much his house had cost to buy and thought this would be about the same as the rebuild cost of his own property.

We thought the question that had been asked was clear and there was guidance provided about how to calculate the rebuild cost. The recommended calculator gave an estimate of between £700,000 and £800,000. We therefore didn’t think Barry had given a reasonable estimate and agreed he was underinsured.

However the insurer said it would have charged £700 rather than £600 for the policy if it had been given a reasonable estimate when the policy was taken out. We thought it was fair for the insurer to settle the claim based on the proportion of the premium Barry paid compared to what he would have paid, rather than reducing the settlement based on the proportion of underinsurance.

We were satisfied this method of proportionate reduction better reflected the impact on the insurer of Barry giving an unreasonable answer. He’d paid 85% of the premium he should have done, so it felt fair for him to receive 85% of the claim settlement in return.

We therefore said the insurer were fair to reduce the settlement, but should pay 85% of the total settlement instead of 50%.