Under Insurance and the Condition of Average

This post deals with under insurance and the Condition of Average as they pertain to a Domestic Household policy which a normal person has on their own home.

The Condition of Average is present in most if not all Household policies. What the condition does is reduce the amount of payment you receive in the event of a claim if it is found the total sum insured is not sufficient to cover the total value at risk. This can be a major problem if you make a claim, and the effect it can have on your settlement payment is not always what you might expect.

The easiest way to explain it is by way of an example.

Mr and Mrs Jones have a standard 3 Bedroom house in a small town in the midlands. The property is quite close to a river and one day the banks burst and flood the house. The Jones's have £10,000 of Contents cover and a flood excess of £350. 

When the claim is examined it turns out that the Jones's actually have £20,000 worth of contents in their house. Accordingly the Insurer applies the Condition of Average to their policy. 

At this point we know two things the Jones's the Jones's have been flooded and their contents are worth 100% more than they have Insured them for.

A loss adjuster is sent to examine the claim for the Insurer. 

He concludes that the Jones's claim  amounts to £5,000 that is to say that the total value of items within the home which have been damaged is £5,000 and that they have an additional £15,000 worth of undamaged goods.  

Okay so now we know that the Jones's have £10,000 worth of insurance cover, the total value of their goods is £20,000 and the amount of their loss/claim is £5,000. This is the point at which a lot of people become confused as to how much money their policy entitles them to.

Your average person will assume that as the Jones's are only claiming for £5,000 and have £10,000 worth of cover the fact that they own goods worth £20,000 is irrelevant. Unfortunately it does not work that way.

The Insurance which the Jones's have taken out is issued (in 99% of cases) on the bases that the sum insured (£10,000 in our example) is the total value of goods in the house.

What I mean by this is that the policy has been issued, and premium quoted for on the basis that the value of the goods is 100% of the value at risk. In reality the Jones's have only received a quote on a 50% basis as they actually have £20,000 worth of goods not £10,000.

As the Jones's have not suffered a 100% loss (a total loss of all goods in the house) we have to run the average calculation. This calculation is not privileged information and is an industry standard.

Now lets continue to work the example.

So the loss Adjuster has to now take the Sum Insured (£10,000) divide that by the actual value at risk (£20,000) and then times that by the total loss (£5000). This gives the loss adjuster the adjusted settlement figure. 

Here it is as a sum

Sum Insured (£10,000)
----------------------    x Total Loss (£5000)   == £2,500 Minus policy excess of £350  
Value at Risk (£20,000)

Total payment to Mr and Mrs Jones is £2,150. 

So on this occasion Mr and Mrs Jones will receive a cheque for £2,150. It should be noted that the policy excess is deducted from the adjusted figure, not the total loss figure. What is immediately clear is that the Jones's now have a significant shortfall between the cost of the damaged goods and the amount of money their policy entitles them to.

One thing I want to make very clear, as I have to fight with Policyholders on this issue quite regularly,is that this is not the Insurer being bad, or trying to wriggle out of payment as much as people want to believe this.
The only person you can blame if you are affected by an average adjustment is yourself.

I say this because when you take out your policy you tell the Insurer how much the stuff in your house is worth. The Insurer then calculates your Premium based on this information. If you deliberately do not tell them a high enough figure to secure a lower premium or you do not bother to properly consider the value of your contents you will, at some point, be bitten and probably shout at the Loss Adjuster when you are to blame. Always remember the Insurer is not psychic  when you call or log onto the internet to buy your policy they ask YOU what your stuff is worth its entirely up to you to make sure you tell them the right figures.

Don't let this condition catch you out, check your policies if you think your Contents are worth more than what the policy sum insured says then call your Insurer and increase the cover. Otherwise at some point you may make a claim and end up very short of cash.

The only time you will receive the total amount of your sum insured if you are under insured is if you suffer a total loss. So say the Jones's house burns down to the ground and everything is gone. In that scenario they would get £10,000 on the basis there goods are actually worth £20,000. Again they would have a huge shortfall despite the Insurer paying out in full.

Be careful because this can happen to you if you are not careful and I have been to peoples houses who have lost everything and had to tell them that they are going to be very short money wise. People usually only think about big things, furniture, carpets electrical goods etc. But the Insurer is issuing the policy based on the value of everything, you do not get to pick and choose which items under the policy are Insured. Remember to consider the value of your clothes, jewelry, art, furniture, tools, cutlery basically anything that is not nailed to a wall.

 The same condition can affect Buildings claims as well, so for the same reasons make sure that your Buildings Sum Insured is how much the estimated rebuild cost of your property is. Please note your Buildings Sum Insured should be the Rebuild cost of your property not the Sale price of your property.

If you are not sure about the rebuild cost of your property go here ABI to the Association of British Insurers website they have a rebuild calculator which can help you work out if your level of cover is sufficient.

 Increasingly I am seeing Insurers issuing Buildings policy on a "no limit" basis. This means that as long as you are honest with the Insurer about what type of building you have at inception you do not need to declare the rebuild value as the policy has no cover limit. But check your policy and make sure you have the right cover.

Making a Domestic Household Claim: What to expect

For my first post I thought I would begin with something most of us will have to do at some point, but can be difficult or include steps you might not expect. I'll refer to Insurance related things in this post (and future ones) but as time goes on will provide a post about the particular subject so don't worry if I mention something briefly which you don't understand.

This is the process (generally) for making a Domestic Household Claim, the process for Commercial claims is different and I may prepare a separate post about this at a later time.

Say you come home to find your house has been flooded or water from a neighboring property has leaked or escaped into yours.

 If the water has escaped from a neighbours property I would not suggest you get too hung up about it and insist on claiming from them directly and not through your Insurers. I will at a later date provide a post about claiming directly from a neighbour or business etc and the pro's and cons but personally I would not recommend it as you will almost always lose out somehow, be it the amount of money you receive or the length of time it takes.

The other thing to remember is that buy not claiming under your policy you are only saving the Insurer money, and not making use of the service you have paid for.

Instead we will assume you call your Insurer straight away (which is what you should do anyway) and report the damage and make a claim.

When you call the Insurers claims number you will be asked a range of standard questions about you, your property, the damage and its alleged cause. Some of the questions may not seem relevant (like how many rooms are in your house etc) but they all help the Insurer to better understand your position and the potential value of your claim. If the claim falls below a certain threshold the Insurer may just deal with the claim over the phone then and there and offer you a cash settlement of what they feel is an appropriate level minus your excess.

If the claim exceeds the call handlers authority level to settle over the phone the claim will, more often than not, be sent out to a Loss Adjuster to investigate and or handle. The person the claim is sent to may be referred to as a Loss Adjuster, Claims Adjuster or Claims Investigator or some variation on this. Their duties will always be broadly the same.

The Loss Adjuster which your claim is sent to will almost certainly work for a company other than your Insurer. So for instance you might be Insured with Aviva but someone from Crawfords might contact you. Most claims are now investigated and handled by Loss Adjusting companies who have a certain level of delegated authority to settle your claim on behalf of the Insurer. Your payment will however always come directly from the Insurer; Loss Adjusting companies do not issue or pay the claims themselves.

Commonly the Loss Adjuster will work for Crawford and Company, Cunningham Lindsey, Davies, G4S and numerous others. Don't be put off or worried by their involvement it, costs you nothing and they are simply the middle men who do the leg work for your Insurer.

When the Loss Adjuster contacts you in writing or by phone they will probably want to visit and inspect the damage, and your property,  for themselves. At this stage they will commonly check whether you require alternative accommodation or not, and send some paperwork to you for completion ahead of their visit.

I'll deal with alternative accommodation and whether you are entitled to it or not in a separate post.

A key piece of paperwork you will probably be sent will ask you to write down the value of all of  the items in each room of your house. This form is usually called a "Value at Risk" form.

 This will seem arduous and time consuming but is unavoidable.

 I have often met resistance from policyholders regarding this step, which is understandable, however if you do not complete the form your claim will almost certainly not move forwards. Basically the quicker you can complete this document the better it is for you.

Most people find this step a bit confusing as they are not claiming for all of the contents of their house and don't understand why they have to now go to the hassle of valuing everything in the property. The reason you have to complete this form is because when you took out your policy you will have told the Insurer that your Contents were worth a certain amount (£5000, £10,000 etc etc) and your Building was worth a certain amount as well.

Now that you are making a claim the Insurer wants to check that the amount of Contents and Buildings cover is sufficient. Basically they are looking to see if you really only have £10,000 worth of Contents or whether in reality your Contents are actually worth more than this.

If it transpires that your Contents are are worth a lot more than the level of cover you took out (for example your cover limit is £10,000, but your Contents are actually worth £20,000) then the Insurer will consider you under insured and this could affect your settlement amount in a variety of ways. ( I will deal with Under Insurance in a separate post)

If the Loss Adjuster visits your property he or she will probably look at your Value at Risk form during the visit and discuss it with you otherwise they may ask you to complete the form and email it to them before or after the meeting (this often depends solely on how the individual Adjuster manages cases). If they look at the form and think you have left items off the form they will discuss this with you and probably want to go around the house and make sure the list is accurate.

They will essentially "take a view" on the value you have written down and what they think the contents of your house are worth based on their professional experience. The thing to remember at this stage is that they are not interested in what you paid for the item, they are interested in what the item would cost to buy as new today as your Domestic policy will be settled on a new for old basis. So if you bought a sofa for £200 10 years ago, but it would cost £700 to replace today, the value of the item is £700.

Once the Value at Risk is agreed, and if it is within your policy limit the Loss Adjuster will explain how they will deal with the damage to your Buildings and Contents. If the building is damaged they will either instruct your Insurers preferred contractors to undertake repairs, or ask you to provide them with three quotes for the repairs.

There are pro's and cons of using the Insurers or your own contractor which I wont go into here as this post is just about what to expect initially.

The same applies for the replacement of contents, if you only have some damaged carpets or a single damaged  TV or similar, then the Loss Adjuster may offer to replace the item via the Insurers contractors or offer you the cash amount that the Insurer can buy the item for. In the alternative the Insurer may send a second company to value your carpets and provide a cheque in settlement. It is worth knowing that if you claim for carpets and not much else a contractor will usually be sent to value the carpets and then you are provided with a voucher which you can use to buy the carpets from set group of shops.

If you have suffered a major loss and you have lost a lot of contents you will be asked to prepare a list of the lost items and provide prices for the items yourself. The Loss Adjuster will then review the list and negotiate settlement with you. Often Insurers will provide the assistance of a contractor in drawing up the list of items, but more often than not you will have to indicate yourself how much you think each item will cost to replace.

Obviously all of this will not all take place at a single visit (unless you have a very small claim) but over a matter of days, weeks or months depending on the size of your claim.

I know that's rather a long post, but broadly speaking that is what to expect when you make a claim in terms of procedure and how it is likely to be handled. There may be some variation depending on the size and type of claim you make but that's the broad procedure for Domestic Property Claims.

In other posts to follow I will go into more depth about a number of the things I have mentioned above, such as under-insurance, value at risk, contractors etc. I will probably also write posts about what is a Loss Adjuster, what is a Loss Adjusting company etc.

Hope that was helpful to someone and I'll try and get some more posts up in the next few days.