The increasing risk of underinsurance and how it can affect landlords
Underinsurance may occur when a policyholder’s insurance does not offer the level of protection they expect, potentially exposing them to a financial shortfall when they make a claim [1].
By letting your insurance policy automatically renew every year, without considering a changing economic landscape or your own circumstances, you may not be suitably covered. For this reason, it can be important to regularly review your property insurance policies.
In the current challenging economic climate, where soaring inflation has pushed up costs, landlords can be exposed to being underinsured.
What does it mean to be underinsured?
If you’re renewing your landlord insurance policy every year without taking inflation or changes to the property into account, your buy-to-let property risks being insured for less than the rebuild cost [2]. This means that if the worst were to happen, and you had to completely rebuild your property, the amount you receive from an insurance claim might not be enough to pay for it.
With fees increasing for landlords, for example insurance due to the cover required to account for rebuild costs, this can also have a knock-on effect on tenants. Rent prices may rise as a result, adding to the current cost of living crisis.
The rising cost of living is making it difficult for some tenants to pay rent. Having a safety net of rent protection may help, which is why Rent Guarantee Insurance could be useful.
What happens if you are underinsured and how might you avoid it?
Claims can be rejected if the property is not insured to its full rebuild value [3], so it’s important to know your asset’s worth.
In the event of a claim on a property that is underinsured, the ‘average clause’ in a policy wording allows insurers to pay a lower amount [4]. If you have taken out an unsuitable level of cover, an insurer may reduce the settlement by the same percentage as the asset is underinsured by.
The BCIS House Rebuilding Cost Index [5] is widely used to provide guidance to surveyors, property owners, and insurance services for the changing costs associated with rebuilding properties.
Underinsurance and the cost of living crisis
While inflation has slowed, it is set to remain high for some time [6]. As we don’t know if or when it may drop again, it’s vital to consider protecting your property. Suitable landlord insurance can provide financial assistance in the event of loss or damage to your buildings and contents, helping to ensure you aren’t left out of pocket. This can be particularly important at the moment, with the cost of living crisis resulting in many having to carefully manage budgets across a range of expenses, from heating bills to food shopping.
As building insurance is calculated not by market value but by rebuild cost - the cost of the materials and labour used to rebuild a property - it can be vulnerable to rising inflation.
Soaring inflation means that the price of materials and labour have risen in the past 12 months, potentially widening the difference between rebuild costs and the amount properties are insured for.
Is inflation protection provided with landlord insurance?
With a range of landlord insurance policies available, you may want to consider how much cover you need and look at policies that can help mitigate the risks of underinsurance.
Index linking, for example, can be a valuable investment for landlords, as it aims to prevent a property from being underinsured by increasing the policy sum insured each time you renew. It factors in changes to costs associated with rebuilding a property, such as labour and building materials. To help with the worry of inflation and the headache of calculating the increasing rebuild value of your property, a landlord insurance policy that is inflation protected can be key.
With Rentguard’s Landlord Insurance, the sum insured on the property will be adjusted monthly in line with the Household Rebuilding Cost Index prepared by the Association of British Insurers [7]. No additional premium will be required for the duration of the policy. On renewal, the premium will be based on the adjusted sum insured using the latest index figures.
An index-linked insurance policy can mean the rebuild value of your property is updated when you renew. You won’t have to worry about the fluctuating value of your property and try to calculate the rebuild cost each time your policy is renewed.
Help is at hand – get in touch with Rentguard
With vast experience handling insurance policies for a wide range of landlords, and with relationships with a number of leading insurers, Rentguard Insurance aims to simplify your insurance arrangements and help to protect your property, its contents, and your liabilities.
Get a quote online or speak to our specialist team on 0333 000 0169.
[1] https://www.ajg.com/uk/news-and-insights/2021/may/underinsurance-the-hidden-risk/
[2] https://abi.bcis.co.uk
[3] https://www.financial-ombudsman.org.uk/consumers/complaints-can-help/insurance/home-insurance
[4] https://www.ajg.com/uk/news-and-insights/2021/may/underinsurance-the-hidden-risk/
[5] https://www.rics.org/uk/products/data-products/insurance/bcis-house-rebuilding-cost-index/
[6] https://www.bankofengland.co.uk/explainers/will-inflation-in-the-uk-keep-rising
[7] https://abi.bcis.co.uk
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The sole purpose of this article is to provide information on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Rentguard and National Residential Landlords Association, an Introducer Appointed Representative of Arthur J. Gallagher Insurance Brokers Limited, accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
National Residential Landlords Association is an Introducer Appointed Representative of Arthur J. Gallagher Insurance Brokers Limited, which is authorised and regulated by the Financial Conduct Authority. Registered Office: Spectrum Building, 7th Floor, 55 Blythswood Street, Glasgow, G2 7AT. Registered in Scotland. Company Number: SC108909. Rentguard is a trading name of Arthur J. Gallagher Insurance Brokers Limited.
