What happens if you are underinsured?
With underinsurance you receive too little not only for a total loss, but for every loss. Even a small claim is reduced in proportion.
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In brief
Underinsurance means that the sum insured is lower than the actual value of what you are insuring. The painful consequence is the proportionality rule: the insurer pays in the same proportion as you were insured. If your home contents are insured for half their actual value, you receive half even for a loss well below the sum insured. Many people think the reduction only applies to a total loss. That is the main misconception about this subject.
Underinsurance rarely arises deliberately. The usual causes are building work or an extension that has not been reported, rising building costs that push the rebuild value up sharply within a few years, a sum insured that was once based on the purchase price rather than the rebuild value, and home contents that have grown with purchases of equipment and furniture. With buildings it is about the rebuild value, not the market value or the property tax valuation: the land is not included, but demolition and clearance costs often are.
The opposite situation, incidentally, gains you nothing. If you insure for too much, you do not receive more than the actual loss, because Article 7:960 of the Dutch Civil Code provides that the payment may not put you in a clearly better position. You are then paying premium for cover you can never use. So pass changes on through notifying a change, and read at what you declare to the insurer which other details matter.
This page deals with one situation. The full overview is on Compare personal liability insurance (AVP).
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We look at the terms as well as the premium, and stay your point of contact when there is a claim.
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How to avoid underinsurance
Four ways it goes wrong, with the corresponding solution.
Work with a value calculator or a valuation
For home contents insurers use a contents value calculator, and for buildings a rebuild value calculator or a valuation report. If you complete those truthfully, a guarantee against underinsuranceusually applies: the insurer then waives the proportionality rule, generally for a limited period. When that period expires the guarantee lapses without notice and you are back to relying on the amount on the policy schedule.
Report building work and extensions
A dormer window, an extension or a more luxurious kitchen increases the rebuild value. If that is not reported, not only is the sum too low but the insurer can also rely on the duty of disclosure and the duty to notify in the conditions. Report the building work preferably before it starts, because during the work the fire and burglary risk of the home changes as well.
Watch the sub-limits, not just the main sum
Even with a correct total sum you can receive too little. For jewellery, watches, audiovisual equipment, cash and items in a shed or garden there is often a a maximum per category. Anyone who owns valuables worth more than that limit needs separate valuables insurance; increasing the contents sum does not solve this.
Check the index-linking
Most policies adjust the sum insured each year in line with an index. That helps, but it does not always follow actual building cost movements and never covers your own investments. Regard index-linking as keeping up with inflation, not as a substitute for a periodic revaluation. Keep the valuation with your policy, so that when you claim you can show on what basis you were insured.
What does your premium depend on?
- Sum insured: the direct basis for the premium
- Rebuild value of the home: based on a valuation or a rebuild value calculator
- With or without a guarantee arrangement: a guarantee against underinsurance costs a little more premium
- Index-linking: annual adjustment of the sum and the premium
- Sub-limits and valuables: separate cover for jewellery and equipment
- Excess: a higher excess lowers the premium
Insurers weigh these details differently. That is where your saving is.
What is covered
| Situation | Without a guarantee | With a guarantee |
|---|---|---|
| A limited kitchen fire while your contents sum is a quarter too low | No | Yes |
| Storm damage to the roof after building costs have risen sharply since the valuation | No | Yes |
| Theft of the television, two years after a value calculator was completed truthfully | Yes | Yes |
| A conservatory extension you never reported burns down with the house | No | No |
| A jewellery collection well above the maximum for that category | No | No |
| Rebuilding to current building regulations costs more than the sum insured | No | Provided that |
The right-hand column says Yes only as long as the declaration the guarantee rests on still matches reality.
Frequently asked questions
This is what people ask us most.
How does an insurer calculate the reduction?
In proportion to the sum insured against the actual value at the time of the loss. If that is eighty per cent, for example, eighty per cent of every loss is paid, however small that loss is. The excess is then deducted as well. Only a valid guarantee against underinsurance prevents this reduction.
Can the property tax valuation be used for buildings insurance?
No. The property tax valuation is a market value including the land and says nothing about what it costs to rebuild the house. With an older home or one with unusual materials, the rebuild value can even exceed the market value. So use a rebuild value calculator or a valuation report. Only those give entitlement to a guarantee arrangement.
I am insured for too much. Will I be paid more?
No. Indemnity insurance pays for the loss actually suffered; Article 7:960 of the Dutch Civil Code prohibits you from ending up better off. Too high a sum therefore only produces too high a premium. It can, however, make sense to leave room for demolition and clearance costs and for the cost of rebuilding to current building regulations, which can be higher than at the time of the original construction.
Does underinsurance also apply to liability insurance?
There it works differently. With liability there is no value to insure but a maximum per event. If the loss is higher than that maximum, the insurer pays up to the sum insured and you bear the rest. So there is no proportionate reduction, but with personal injury the excess amount can be substantial. So do not choose the lowest sum insured.
Every situation is different. For these situations we have a separate page.
- Finance: we refer you onThe main page
- Which factors determine the premium for your property insurance?Rebuild value, construction type, excess
- Saving money on your property insuranceComparing, double cover, excess
- Releasing equity from your mortgage
- Which insurance is the cheapest?Premium versus conditions, total cost, comparing
- Releasing equity from your homeIncrease, refurbishment, adjusting cover
- Calculating the value of your homeMarket value, WOZ, rebuild value