Underinsurance: Why Insuring Your Home for Too Little Can Cost You

One of the most common insurance mistakes is also one of the easiest to overlook: insuring your home or contents for less than it would actually cost to replace them.

At first, this may seem harmless. A lower insured value can mean a lower premium. But if a major claim happens, being underinsured can leave you responsible for a significant portion of the loss yourself.

That is why it is important to understand how insured values work.

What does underinsurance mean?

Underinsurance happens when the amount shown on your policy is lower than the true replacement value of the property being insured.

For example, your household contents may be insured for R500,000. But if replacing everything in your home would actually cost R800,000, you are underinsured by R300,000.

The same principle can apply to buildings. The insured value should generally reflect what it would cost to rebuild the property, not simply what you paid for the house or what you think it could sell for.

Market value and replacement value are not the same thing

This is especially important with buildings insurance. The market value of your property includes location, land value, demand in the area, nearby amenities and property market conditions.

Buildings insurance is usually concerned with the cost of rebuilding the insured structures after a loss. That can include building materials, labour, professional fees, demolition, debris removal, rebuilding costs, fixtures and permanent improvements.

A property worth R3 million on the market does not necessarily cost R3 million to rebuild. The correct insured value needs to be considered separately.

Your contents are probably worth more than you think

Most people underestimate the value of everything inside their homes. It is easy to think about the obvious items such as the television, fridge, couches and beds, but contents insurance can include hundreds or even thousands of smaller items accumulated over many years.

Think about clothing, shoes, linen, kitchen appliances, crockery, cutlery, furniture, electronics, computers, books, tools, sports equipment, children's belongings, curtains, decorative items and outdoor furniture. Replacing all of these items at today's prices can become very expensive.

What is the average clause?

Some insurance policies apply what is commonly called the average clause when property is underinsured. This means a claim may be reduced in proportion to the amount of underinsurance.

For example, imagine your household contents are actually worth R1 million, but you only insured them for R500,000. You are effectively insured for only 50% of their value.

If you then suffer a covered loss of R200,000, the insurer may apply average and only pay a proportion of that claim, subject to the policy wording. In a simplified example, R200,000 × 50% insured = R100,000 settlement.

The remaining amount may be your responsibility. This is why underinsurance can affect partial claims, not only total losses.

Inflation can create underinsurance over time

You may have chosen the correct insured value when the policy started, but replacement costs do not stay the same. Building materials, labour, appliances, furniture and electronics can all become more expensive over time.

If your sums insured are not reviewed regularly, your cover can gradually become inadequate. This is particularly important during periods of high inflation or rapidly increasing construction costs.

Renovations can change your building value

Any significant improvement to your property can increase its rebuilding cost. Examples include building additional rooms, adding a garage, renovating kitchens or bathrooms, installing solar equipment, adding swimming pools, building entertainment areas, installing expensive flooring, adding boundary walls or gates, and constructing cottages or outbuildings.

If the property has changed substantially since the policy was taken out, the insured value may need to change too.

Solar installations are easy to forget

A solar installation can represent a significant investment. Panels, batteries, inverters and permanently installed equipment may need to be included in the building sum insured, depending on how your policy is structured.

If you spend R200,000 upgrading your property but never update your insured value, the policy may no longer reflect the true replacement cost of the home. Major upgrades should always trigger an insurance review.

High-value items may need separate attention

Increasing your overall contents value does not necessarily mean every valuable item is automatically fully covered. Some policies place limits on certain categories of belongings, including jewellery, watches, fine art, collectibles, cameras, computers and sporting equipment.

Portable valuables may also need to be separately specified under all-risks cover if they are taken away from the home. Ask your broker whether any individual limits apply.

How often should you review your insured values?

A useful habit is to review them at least once a year. You should also consider reviewing your cover whenever there is a major change, such as renovations, installing solar, buying expensive furniture, acquiring valuable jewellery, moving house, building additional structures, household growth or significant changes in construction costs.

Insurance should change as your circumstances change.

How can you estimate your household contents value?

One practical approach is to go room by room. Imagine the entire room was empty tomorrow. What would it cost to replace everything inside it with similar items?

Do this for bedrooms, the kitchen, lounge, dining room, garage, home office, patio and storage areas, then add the totals together. The final figure may surprise you.

A lower insured value is not always a saving

It can be tempting to reduce insured values to lower your monthly premium. But insurance is designed to protect you against losses you may not be able to absorb yourself.

Saving a small amount every month can become extremely expensive if a large claim is reduced because the property was substantially underinsured. The objective should not be to insure for the lowest possible amount. It should be to insure for an appropriate amount.

Ask your broker the right questions

When reviewing your home insurance, ask: Is my building insured for its realistic rebuilding cost? Would my contents sum insured replace everything in my home at today's prices? Does my policy apply average if I am underinsured? Have my renovations or upgrades been included? Do any of my valuable items need to be specified separately?

Taking the time to answer these questions can make an enormous difference when a serious claim occurs.

At AIR Insure, we believe the best time to discover a gap in your insurance is before you need to claim.

Invest. Inform. Insure.

This article provides general information and does not constitute advice tailored to your circumstances. Cover varies between insurers and policies and is subject to the policy schedule, wording, limits, excesses, exclusions and conditions. Contact Phoenix Risk Solutions for advice based on your specific needs