Don't risk under-insurance

If we put too low a value on our house contents, there can be a price to pay later, warns Stephen Pritchard

I nsurance is a cost that most home-buyers pay little attention to. But although household insurance premiums are relatively stable, the amount most of us need to insure is on the increase. The latest quarterly survey of premiums by broker AA Insurance found that buildings and contents insurance costs have fallen slightly since last year; and buildings insurance has only risen by one per cent over the past decade. But average premiums reveal only part of the picture.

I nsurance is a cost that most home-buyers pay little attention to. But although household insurance premiums are relatively stable, the amount most of us need to insure is on the increase. The latest quarterly survey of premiums by broker AA Insurance found that buildings and contents insurance costs have fallen slightly since last year; and buildings insurance has only risen by one per cent over the past decade. But average premiums reveal only part of the picture.

With insurance policies priced according to the value of the contents, the more valuables a household owns, the more it will need to find for premiums. Despite this, a large proportion of households take out less insurance than they really need. This, insurance industry experts suggest, is not because most households want to avoid paying the full cost of insurance; rather, they have little true idea of how much their home contents are worth.

A survey carried out by More Than, the insurers, found that half of homeowners think that their possessions are worth under £20,000. The reality is that the typical family home contains goods worth over £40,000. The value of home contents has increased by over 50 per cent, according to More Than, since 2004. Today, the typical household has possessions worth £44,447, compared with £29,603 in 1994.

The increase is being driven by our growing appetite for electronic goods and other gadgets. As many as 44 per cent of homes now have a computer, and 67 per cent have more than two TVs. Items such as sophisticated mobile phones, iPods and digital cameras are also pushing up contents values.

Nor is it only electronic goods that lie behind the increase in the value of contents. An average wardrobe costs £4,000, and children bring possessions worth about £9,000. Even baby equipment costs £680.

"The prices of TVs and DVD players are declining but we are becoming multiple purchasers," says Jon Sellors, consumer affairs spokesman at More Than. "If we upgrade the TV, we move the original TV to the kitchen or kids' room. Households might have a VCR, a DVD and a home cinema system."

All too often, though, homeowners do not realise the value of their accumulated consumer durables and valuables. As a result they will pick too low a level of insurance cover. A lower level of cover means lower annual insurance premiums. But if insurers find that a household does not have enough cover, they will scale down any claims, usually in proportion to the level of under-insurance. So, when policyholders come to claim, they can feel that they have paid premiums for little in return. The problem is at its worst for large losses, including through fire and theft.

The difference between the true value of possessions and the householders' estimates of their value is greatest in London and the South-east. In London, the gap is almost £28,000. That could lead to householders receiving insurance payouts that are less than half the value of their possessions.

This has led some insurers to move to standard sums for contents and buildings cover, rather than depending on homeowners to calculate - or guess - how much their possessions are worth. More Than now offers £60,000 of contents cover as standard, with premiums based on the type of house, its location and age. This, Mr Sellors says, is simpler than letting householders work out their own sums insured, and all too often, underestimate what they own. "We have not been good at educating people about the level of cover they need," he says.

The issue is, though, less severe when it comes to buildings insurance. The cost of rebuilding a property excludes the cost of the land.

In much of the UK, land costs are such that rebuilding costs less than half the market value of the property. This leads householders to overestimate the sums they need to insure for their buildings cover, with buyers often opting to cover the purchase price of their homes, rather than the actual rebuilding cost. Over-insurance will not, however, lead to a greater payout following fire, flood or subsidence.

Professional valuers and surveyors should offer home-buyers an estimate of the rebuilding cost as part of their pre-purchase survey report. If not, insurers should be able to give guidance, by referring to land values and local building costs. But homeowners with expensive tastes for interior fixtures and fittings will need to allow for these. Insurers' estimates of rebuilding costs are based on average properties.

Fit an expensive kitchen and bathroom and you should tell the insurer. If you don't, cover might not be adequate.