Understanding the risks of underinsurance for landlords
As a landlord, protecting your investment property is paramount. Yet, many landlords unknowingly face significant risks due to underinsurance.
Underinsurance occurs when your insurance coverage is insufficient to cover the full cost of rebuilding your property after a loss. For landlords, this can lead to devastating financial consequences that could jeopardise your rental income, property value, and long-term investment goals.
The cost of underinsurance
Underinsurance often arises because rebuild costs fluctuate over time. If your insurance policy is not regularly updated to reflect these changes, you might find that the payout after a claim falls short of what’s needed to restore your property to its original condition. This gap can be substantial and can often leave you with hefty repair bills to put your property right.
Your claim does not have to be a full loss for it to be deemed underinsured. At the point of claim, if the cost to rebuild your property is more than stated within your policy you are underinsured. The insurer may then apply a ‘pro rata condition of average’ to your current claim. For example, if the rebuild value on your policy is only 50% of the actual rebuild value, the insurer will pay you 50% of the claim value. Therefore, if your claim will need £10,000 to repair the damage, the insurer will pay you £5,000 (less any excess). You will need to foot the remaining £5,000 to complete the reinstatement works.
Protecting your investment
To reduce the risk of underinsurance, consider taking the following steps:
- Regularly review and update your policy: Conduct annual reviews of your insurance policy, particularly after making any improvements to the property. Ensure that your coverage reflects the current rebuild costs and the value of the improvements.
- Ensure your policy is based on rebuild value not market value: Market value is what your property is currently worth for sale. However, the rebuild value is made up of the cost of materials and labour to rebuild your property should you suffer a full loss. This figure should also include plumbing, electrics and even the demolition and clearing of the old property.
- Use the services of a chartered surveyor: There are tools online that can help you estimate the rebuild value of your property; however, to gain an accurate value you will need to employ the services of a chartered surveyor. You can find a chartered surveyor in your area by visiting the Royal Institute of Chartered Surveyors website.
- Understand your policy: Take the time to thoroughly understand what your insurance policy covers and where there might be gaps. Speak with your insurance provider or broker to clarify any doubts and ensure you have adequate coverage for your needs.
- Speak to a broker when purchasing insurance: An insurance broker, especially one that specialises in landlord insurance, will be able to provide you with help and advice to ensure your policy adequately covers your needs.
Underinsurance is a significant risk that many landlords overlook, often with severe consequences. By regularly reviewing your insurance coverage, understanding your policy, and ensuring that your property is fully protected, you can safeguard your investment and avoid the financial pitfalls associated with underinsurance. Don’t wait until it’s too late, take proactive steps now to protect your property.
