What is underinsurance and why does it matter?
What is underinsurance?
Underinsurance occurs when the sum insured on your policy — the maximum amount your insurer will pay — is less than the true cost of replacing or rebuilding what you've insured. It can happen gradually, for example if rebuild costs or the value of your contents increase over time but you don't update your policy accordingly.
Why does it matter?
Many insurance policies include what is known as an “average clause” or “condition of average.” If this clause applies and you are underinsured, the insurer may reduce your claim payout proportionally. This can come as a shock, particularly after a serious loss.
Example: How the average clause works
Illustrative example
- True rebuild cost: £400,000
- Sum insured on policy: £250,000
- Adequacy: 62.5% (250,000 ÷ 400,000)
- Claim submitted: £80,000
- Potential payout after average clause: £50,000 (62.5% of £80,000)
- Potential shortfall: £30,000
Illustrative only. Whether the average clause applies depends on your specific policy wording.
Contents underinsurance
Contents underinsurance often happens because people underestimate how much their possessions are worth. It's easy to forget low-cost items that add up — clothing, books, kitchen equipment, tools — or to forget about items you purchased recently. High-value items such as jewellery, art, or specialist equipment may need to be specified separately on the policy.
Buildings underinsurance
Buildings underinsurance is common in the UK. Rebuild costs have risen significantly in recent years, meaning policies taken out some years ago may now have an inadequate sum insured. It's important to understand that rebuild cost is not the same as market value — see our guide on rebuild cost vs market value.
How to check whether you might be underinsured
Use our underinsurance calculator to compare your current sum insured with your estimated true replacement value. For buildings, use our rebuild cost calculator as a starting point. For a definitive figure, consider a professional rebuild cost assessment from a RICS-accredited surveyor.
Frequently asked questions
Underinsurance means the sum insured on your policy is less than the true replacement or rebuild cost of what you're covering. If you make a claim, the insurer may only pay out a proportion of the claim — not the full amount you expected.
Many home and contents policies include an 'average clause' (sometimes called 'condition of average'). If you are underinsured, it allows the insurer to reduce your claim settlement in proportion to how underinsured you are. For example, if you're 50% underinsured, the insurer may pay only 50% of your claim.
Underinsurance is very common. Research by the British Insurance Brokers' Association and others has found that a significant proportion of UK homeowners and businesses have sum insured values that are materially below the true replacement or rebuild cost.
For buildings, commission a professional rebuild cost assessment or use an online tool anchored to RICS/BCIS data. For contents, carry out a room-by-room inventory and total the replacement cost of everything. Review both figures each year and when you make significant purchases or improvements.
No. Rebuild cost is the cost to demolish and reconstruct your home from scratch, including materials, labour, professional fees and debris removal. Market value reflects what a buyer would pay, which includes the land and local demand. In many areas rebuild cost is significantly lower than market value — but in some areas or for older or unusual properties it can be higher.
Related calculators
Home insurance
Underinsurance Calculator
Check whether your sum insured may leave you underinsured and estimate the potential shortfall.
Home insurance
Contents Insurance Calculator
Build up an estimate of what your home contents are worth to replace.
Home insurance
Rebuild Cost Calculator
Get a rough estimate of your home's rebuild cost — which is not the same as its market value.
Disclaimer
This is a simplified estimate based on the assumptions shown above. It isn't a quote, and a real insurer may arrive at a different figure. Use it as a starting point, then check the details with your insurer or adviser.