Are your values and sums insured correct?

February 20, 2023

The ultimate test of any insurance policy comes in the event that you need to make a claim.

If you have home insurance or motor insurance, for instance, is the cover you have arranged sufficient to make good your financial losses?

Is the cover enough to pay for the repairs and reinstatement needed to your home after a loss? Will the settlement of your claim cover the cost of repairing or replacing lost items of your home contents? Or will the amount covered under your motor insurance policy be enough to cover the cost of repairs after an accident or, in the event of the car being written off, even provide the funds you’d need to buy a new vehicle?

These questions are critical because the very maximum any insurer is obliged to pay out in the settlement of your claim is the total sum insured – and if that sum is insufficient to repair or replace damaged or lost items, you must make up the difference from your own pocket.

Motor insurance

You may be aware that insurance for your car is available to cover third-party risks only – the minimum you are legally required to arrange – third-party, fire, and theft, or comprehensive insurance.

Under each of these options, there is a maximum limit of indemnity – the maximum your insurer is obliged to pay. But third-party insurance does not provide cover at all for any damage or loss to your own vehicle.

If the risks of fire and theft are added to your cover, you are entitled to a settlement up to the value of the vehicle (Sum Insured) you have declared less any excess*. It is important, therefore, that the sum insured you have declared is an accurate value for your car so that you can receive up to that amount in the event that fire destroys it, or it is stolen and remains unrecovered.

Only comprehensive motor insurance covers you against accidental damage – and, once again, you must ensure that your cover is sufficient to allow you to buy a replacement vehicle of comparable age, mileage, and condition if the insured vehicle is stolen or damaged beyond repair. It is also important to ensure the declared value is accurate at each subsequent renewal as some Insurers will not insure high valued vehicles. As the age of the vehicle gets older, the value typically reduces and as a result you may obtain more competitive premiums.

GAP insurance

If your vehicle is new and on finance, you may need to consider GAP insurance. This insurance fills the “gap” between the maximum sum insured on your vehicle under your motor insurance policy and any outstanding finance amount.

These “gaps” occur because as soon as your drive a new vehicle off the showroom forecourt, it will depreciate in value – typically dropping between 15% and 35% in the first year and up to 50% or more over three years.

In the event of a claim, the insurance company will only pay up to the current value of thevehicle. This may typically be less than the amount of outstanding finance.

Buildings

If you own your home, it probably represents one of the biggest investments you are likely to make in life – so big that you will want to protect that investment with adequate insurance. A similar concern will be reflected in your ownership of any commercial or business premises.

It is also important to note that if your property is mortgaged, under the terms of your mortgage agreement, you will typically be obliged to always have buildings insurance in place to protect both you and your mortgage provider’s financial interest in the property.

In the case of such important investments, buildings insurance is there to anticipate a worst-case scenario in which the entire building is so damaged that it must be demolished and rebuilt – it is a total loss.

To ensure that the values and sums insured in your building insurance are sufficient, therefore, you must calculate all those costs of reconstruction – including demolition, site clearance, the preparation of plans and drawings, and the eventual rebuilding, plus all the associated fees paid for professional services from architects, engineers, lawyers, and the like.

As our previous blog explains, there are freely-available resources to help you calculate those costs. In respect of residential property, for example, the Association of British Insurers (ABI), together with the Royal Institution of Chartered Surveyors (RICS), jointly provide the BCIS Residential Rebuilding Cost Calculator. This can be used entirely free of charge by personal visitors to the website for as many as four calculations a year.

By way of additional subscription, there is also a wide range of other services for residential property, including a home rebuild cost calculator and BCIS’ current Schedule of Rates.

*The excess is the first part of any successful claim that you are financially liable for.