Underinsurance crisis: Homeowners, farms and businesses risk major shortfalls when making claims
AIA Loss Assessors are warning that the financial consequences can be severe when a claim arises.
A growing number of Irish homeowners, farmers and business owners are unknowingly leaving themselves financially exposed due to significant underinsurance – where their sum insured (i.e., how much your property is insured for) is less than the estimated cost of rebuilding. AIA Loss Assessors are warning that the financial consequences can be severe when a claim arises.
At the heart of the problem is a little-understood policy condition known as the Rule of Average. When a property is insured for less than its true rebuild value, insurers are entitled to reduce any claim settlement by the same percentage as the underinsurance.
For example, if a home is insured for €200,000 but the actual rebuild cost is €400,000, the property is insured for only 50% of its value. As a result, the insurer will pay just 50% of any valid claim. An agreed storm damage claim of €12,000 would therefore result in a payout of only €6,000, leaving the policyholder to cover the remaining costs themselves.
Ireland’s underinsurance problem has intensified in recent years due to rapidly rising construction costs. The Society of Chartered Surveyors Ireland (SCSI) has repeatedly highlighted that rebuild costs have outpaced general inflation. Policies taken out even a few years ago and never reviewed are now likely to be significantly out of date.
The issue is equally serious for agricultural and commercial policyholders. Farms, shops, factories and warehouses that insure buildings, stock or equipment below current market values may find that following a fire or flood, the settlement falls far short of what is required to fully restore operations. In many cases, the financial gap can be devastating.
AIA Loss Assessors are urging all policyholders to review their sums insured annually. “You have to imagine the worst-case scenario," managing director, Pat McCormack advises. “If your home or business was destroyed in the morning, would your current sum insured cover the full rebuild? It’s a stark question – but one that needs to be asked.”
To help address this issue, AIA Loss Assessors are offering a free Value at Risk assessment for readers. For a free virtual assessment, contact (094) 901 0132 or info@aia.ie.
Rule of average - Example
Property insured: €200,000.
Estimated rebuild cost: €400,000. Underinsured by 50%
Agreed claim settlement: €12,000 - Payout after average applied: €6,000
