Why do landlords underinsure?
There are five main reasons why properties are being underinsured
It’s a common misconception that landlords only underinsure properties as a means of chasing cheaper premiums, when it’s more likely to be that they have failed to include everything when calculating the rebuild cost.
The ‘buildings sum insured’ is the cost of rebuilding the property if it were to be completely destroyed.
This should include things like the removal of debris and any professional fees. It’s easy to overlook these costs, but they all add up.
While it is true that premiums have been impacted by the current rate of index linking, the reality is that landlords are not going to save a great deal of money by doing this.
For example, with the current rate of index linking, a £200,000 rebuild at the start of 2022 is now costing around £235,000. This extra £35,000 would add around £50.00 to the annual premium, depending on your postcode.
It's also worth knowing that there are steps landlords can take to protect themselves against any increase in insurance premiums. For example, if you rarely make claims, it might be worth increasing your excess as this will reduce your premium without affecting your level of cover.
Instances of underinsurance are just as likely to be the result of confusion and lack of information as they are a deliberate route to a cheaper premium.
More often than not, it’s simply a case of understanding everything about the property, as well as its rebuild value and market value.
There are a number of reasons why landlords might be underinsured, here we investigate and explain what are:
As we’ve mentioned, buildings insurance works on the basis of rebuild value, as opposed to market value.
If you insure your property for less than the rebuild value then it is underinsured. This would mean that in the event of a claim, insurers will not pay the full amount, they will apply what is known as ‘average’.
If a tenant causes damage to a property for example, the landlord would not be able to make a claim unless they had taken out specialist buy to let insurance.With a specialist policy in place, landlords can avoid any unnecessary financial loss should the worst-case scenario actually happen.
If a landlord underestimates the time it will take to get the property back to a liveable or workable condition following an insurance claim, the loss of rent insurance may not cover a long enough period.
Carrying out improvements to your rental property such as adding an extension will increase the value of the property, but will impact the insurance value too.
Similarly, a common underinsurance scenario occurs when a property owner simply renews their insurance policy year after year without making any updates that take market inflation into account.
Getting out of an old underinsured policy before taking out a more practical specialist policy is often quite simple as long as you haven’t made any claims during the policy year. You might even find that you’re still in your ‘cooling off’ period. Note, however, that if you are not still within this period you might need to pay administration fees upon leaving.
