Insurance is all about peace of mind. That’s why, even if we might grumble about the cost, most consumers accept the need to pay the annual premiums to ensure their car, their home, their health, travel or even their life is protected.
But that doesn’t stop people shopping around every year for the best deal available come renewal time – especially when it comes to our home or our car. Cutting a deal always brings with it a feel-good factor but it is important to make sure that we don’t cut corners in pursuit of that bargain.
Opting for third party, fire and theft over comprehensive cover will certainly lower your car insurance premium but it could leave you without wheels if your car is damaged as a result of a mistake you make.
When it comes to your home, cutting corners could prove even more catastrophic – if only because the numbers are bigger and while we might survive without a car, we all need somewhere to lay our head.
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Underinsurance is becoming a growing problem in Ireland, in both the residential and commercial sectors. And people living in apartments could find themselves particularly vulnerable.
So what is underinsurance and why is it a problem?
When you buy an insurance policy on your home, it usually has two main elements – buildings and contents. Both can be affected by underinsurance but it is more of an issue with the buildings element of your policy.
Underinsurance is where the amount you have insured your home – the reinstatement cost – is less than the actual cost of rebuilding it if it is destroyed by fire or anything else.
If you insure your home for, say, €400,000 but it will actually cost €600,000 to rebuild, €400,000 is all you will get if it is a write off, leaving you to find €200,000 yourself from your other resources.
Okay, you say, but it is rare that a house is destroyed: normally, you are just claiming for damage to the property – say €20,000 after some bad flood damage. So what’s the problem? Your €400,000 cover will certainly be enough for that.
But, it won’t. That’s not the way it works. If the insurance company – or the loss adjuster who assesses your damage for the insurer – decides that the property is underinsured, only a portion of any claim will be paid.
Taking our example, where your home is insured for €400,000 but will cost €600,000 to rebuild, your cover is just two-thirds of what it should be. In that case the insurer will pay only two-thirds of any claim so you will only get €13,200 to cover the €20,000 cost of your flood damage claim.
Once you are underinsured, everything is paid pro rata.
This is what has happened in the tragic case of Creeslough, where 10 people died in a gas explosion three years ago. Among those affected were the owners of a number of apartments in the building.
The insurer, Aviva, is now asking the High Court how its insurance payout should be divided between the apartment owners and the building owner who, in this case, had taken out a block insurance policy covering the rebuilding cost of the while building, including the individual apartments. This follows a dispute between the two, with the apartment owners claiming they are being unfairly left out of pocket.
And in the commercial world, nine out of 10 premises are underinsured, says chartered building surveyor Trevor Kelly. He cites one particular case where a hospitality business made a claim for close to €1 million but, because it was underinsured, just under €350,000 was paid.
But how does this happen and what should you do to avoid it?
There are two basic ways people mistake rebuilding costs. Either they give an incorrect figure when they first take out the policy, or they fail to adjust it – or adjust it incorrectly – in subsequent years upon renewal.
You would be astonished at the number of people who, when on the phone to an insurance company or broker, simply guess a figure for buildings cover.
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A separate problem, though not really an issue in the Irish market, is to confuse the market value of your home with the insurable value of its buildings. There is no necessary connection between market value and rebuilding cost. However, given the property market in Ireland, if you are insuring your building for the market value, you are likely overinsured rather than underinsured.
Realistically, most people buying a home will get a professional survey done of the property to try to make sure there are no unpleasant surprises lurking behind the decor. You’re paying for that anyway and these are the same people who conduct property valuations.
While it might be chastening to realise the rebuild cost is significantly less than the price you are paying, it should at least give you an accurate starting point.
The other way is to consult the rebuilding costs calculator published annually by the Society of Chartered Surveyors Ireland (SCSI), the most recent version of which you can find here. But you need to be aware what it covers and, more importantly, what it does not.
First, the calculator looks only at certain house types. Noticeably that does not include apartments, nor one-off homes. It really focuses on houses in estates or urban settings – and even then only in certain parts of the State.
The SCSI also stresses that the figures it sets out per square metre are a minimum. If the property is built to a higher spec than the industry standard, you need to allow for that. The same applies for fittings such as kitchens, bathrooms, wardrobes and finishes.
If you have an outdoor garage or shed, you’ll need to build in an allowance for them – the SCSI estimated in November 2024 (the most recent edition) that a single garage would cost €22,880 to rebuild, for instance which might surprise some people.
The bottom line is that the SCSI number should be a base figure; you are likely to have to increase that to allow for the particular features on your home.
The second issue is adjusting your buildings cover on subsequent annual renewals. Some policies will make an allowance for inflation but you want to check what that is being measured against. Some index at a set percentage, others against an index.
But inflation in the construction sector can run ahead of the general rates of inflation as measured by the consumer price index.
The most accurate way might be a formal valuation but, given the cost, that’s hardly a practical option for most people unless your home’s a mansion. More practically, you can consult the latest SCSI calculator, which does make allowance for inflation.
However, those figures are also “of the moment”. For instance, if you are renewing your policy around now, the SCSI calculator you are consulting was published last November and, inevitably, it is based on figures that were collated slightly earlier than that. So you will also need to factor in inflation since that time.
If in doubt, err on the high side, though not ludicrously so as no insurer will pay over the actual reinstatement cost – or pro rata against it.
For most of us, our home will be our most valuable asset and, given the cost of the premium, you really are quibbling over pennies
Apartment present a particular problem as, in many case, buildings cover for all the individual apartments are arranged by the management committee through a block insurance. If the committee gets that wrong, or fails to adequately update it, everyone could be left substantially out of pocket should the worst happen.
The sometimes opaque nature of management committees and their finances doesn’t help.
Apartments are a case where it makes sense to get a formal valuation, given the number of homes involved. If you own an apartment, make sure block cover is in place and check when a formal valuation was last carried out. Inquire also what, if any adjustment has been made for inflation in any renewals since that valuation.
For most of us, our home will be our most valuable asset and, given the cost of the premium, you really are quibbling over pennies. Buildings rarely get destroyed and so the cost of insuring them is really quite modest in the scheme of things – certainly compared with the actual value.
But, whatever you do, don’t cut corners by lowballing the likely cost of rebuilding your home. Failing to take the time to ensure you are adequately covered really is a false economy, not least as you will be having to pay the price at a time when you are already at a low because your home has been destroyed.
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here
