Underinsurance is the most important – and perhaps most misunderstood – rule in home insurance: if the sum insured is lower than the property's real value, the insurer may settle the claim proportionally. This is a plain fact about how the product works, not scaremongering – and, most importantly, a few good habits can rule it out almost entirely.
- Underinsurance = the sum insured is lower than the property's real (rebuilding or replacement) value.
- The consequence can be proportional (pro rata) settlement: for a house insured at half its value, the insurer may pay only half the damage, even for a partial claim.
- Protection comes down to three habits: a real value at inception, accepting indexation, and an annual review – with a mid-term increase after any major investment.
How our own guesswork misleads us
Most people start from market price – yet the question insurance actually asks isn't what the flat would sell for, but what it would cost to rebuild. The two can differ enormously: market price includes the plot and the neighbourhood, while rebuilding cost reflects today's material and labour prices (the difference in detail). The other typical mistake is carrying forward a figure set years ago: building costs may have shifted substantially since then, but the number fixed in the policy doesn't grow on its own.
The same trap applies to contents: added up room by room, the value of furniture, appliances and clothes is typically far higher than the first guess – which is why a room-by-room inventory estimate pays off.
What happens at claim time? The rule, stated plainly
The general principle in property insurance: if the sum insured is lower than the real value at the time of the claim, the insurer typically settles the claim in the same proportion as the sum insured bears to the real value. As a principle, without figures: for a house insured at half its real value, even a roof leak or a fire claim may only be settled at half the damage – the family keeps the rest of the loss. Underinsurance, then, doesn't only hurt in a total loss: it also cuts into partial claims.
The exact rules – including any tolerance bands or allowances – are set out in the given insurer's terms; it is worth checking for this too when comparing quotes.
Why is this not a trick by the insurer?
Because the premium is proportional to the sum insured: whoever insures for a lower sum pays a lower premium – meaning they've effectively kept part of the risk for themselves. Proportional settlement simply makes that visible, just at the worst possible moment. The mechanism is logical, but its timing is merciless: it stays unnoticed for years and typically only surfaces at a major claim.
That's why we treat it as a fact, not a scare story: it isn't something to fear, but something to rule out through upkeep. The good news is that many of today's products work with recommended per-square-metre values and value tracking – using them narrows the risk considerably.
The fix: three habits that rule it out
First: at inception, start from a real rebuilding value – for the building, based on floor area, structure and fittings; for contents, with a realistic, inventory-based estimate. Second: don't reject indexation at renewal out of reflex – value tracking isn't a premium-raising trick, it's upkeep for the sum insured. Third: spend a quarter of an hour a year on an annual review; after a major renovation, extension, solar installation or big-ticket purchase, ask for a mid-term increase instead of waiting.
With these three habits in place, proportional settlement is unlikely to affect you in practice – the policy delivers what you're paying for. If you have questions, bring your existing policy; the consultation is free of charge.
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