House contents - The perils of underinsurance
Insurers and professional valuation companies have highlighted problems which arise in the circumstances of contents underinsurance particularly when the owners provide their own valuations. The article provides a number of case studies to illustrate the kind of issues that may arise.
The problem of policyholders underestimating the value of their contents is viewed as a matter of growing concern. The disparity between the insured value and the real value can often be very high particularly with regard to accelerating jewellery prices. At rhg, in conjunction with Insurers and valuation companies we would strongly recommend that you attempt to review jewellery valuations every two to three years to ensure the ability to replace like with like.
With a variety of Mid to High Net Worth Insurers in the market place, identifying the right insurer to suit the client’s particular circumstances is very important. Whether as a direct client or through the agency of a broker, it is essential that the values provided by the client are correct as the responsibility for such values lies with the client and not the insurer.
Fact : One in five British households is under-insured
Even in 2011, it was estimated that some 6.8 million British households were then underinsured, with £200bn of home contents at risk in total. (Telegraph, 16 Jan 2011). According to the Association of British Insurers latest guide on buildings and contents insurance, research shows that one in five households could be underinsured because they did not know how much their home contents were worth. (source Hiscox Insurance website).
This very much bears out professional valuation companies own experiences where a high percentage of the contents inspected have been found to be incorrectly valued.
< £200K / 8 / 7 / 33% / 0 / 1 / 32%
£200K to £250K / 11 / 9 / 40.18% / 1 / 1 / 9.60%
£250K to £300K / 11 / 9 / 35.3% / 1 / 1 / 5.05%
£300K to £350K / 11 / 6 / 34.2% / 4 / 1 / 18.0%
> £350K / 24 / 16 / 22.8% / 3 / 5 / 7%
This table shows a sample of 65 Walk Through Validations conducted over a random month looking at and updating existing policies.In the range of up to £200k, 87% of the sample indicated under insurance of 33% of value. At £200 to £250K the percentage of those underinsured falls a little, but the percentage of those policies underinsured rises to 40%.
A policy was voided for underinsurance – Really ?
The risks attached to underinsurance are clearly illustrated in cases appended to the Financial Ombudsman Service article. In one instance, the insurer voided the policy for underinsurance. The customer was only insured for up to £25,000. Following a break-in when all of her jewellery was taken, the loss adjuster found that replacing all the lost items would cost over £120,000. Obviously, such a situation scaled up in the HNW market could result in even more serious loss.
The covering letter accompanying each year’s renewal form stated in bold text “Please ensure all the information you provide is accurate and up to date, as any inaccurate information could impact upon the success of future claims.” The renewal forms that the customer signed and returned each year asked her to “Please check this information carefully and call us immediately if anything is untrue, incomplete or out of date so we can send you new documents.” Below the section headed “Contents”, the customer had been asked to confirm that “the full cost of replacing the contents of your property does not exceed £25,000.”
The insurer cancelled the policy and refunded all of the premiums, explaining that the customer was so severely under-insured that “voiding” the policy was the only available option as, had they know the true value of the contents of the house, they wouldn’t have insured the customer in the first place. Their underwriting guidance clearly stated that insurance wouldn’t be granted if the contents were worth more than £100,000, or if there was an “excessive amount of jewellery.”
Fact: There is a Failure to take account of rising jewellery prices
Another case involved the changing value of gold jewellery where £8,500 was claimed for a lost gold bracelet appearing on the current insurance schedule still at its original valuation ofsome years earlier at £4,500. The insurer declined to pay the full £8,500 on the grounds that they had made clear to the customer that it was his responsibility for keeping the valuation of the bracelet up to date and that there might be consequences to under-insuring his possessions. Covering letters sent out with the annual renewals required the customer to “check that the level of cover is sufficient as prices and circumstances can change each year.” Similar warnings also appeared in the forms.
This case particularly re-enforces the need for regular professional valuations to keep abreast of changing market values. It is worth noting that in Holland there is a legal requirement that valuations are no more than three years old. In this country, it is not uncommon to find valuations dating back fifteen years or more!
It is the client’s responsibility for full insurance value – Really ?
The Financial Ombudsman recognises that it may be difficult for people to calculate the value of their possessions, but is clear that “They’re responsible, when asked, for giving the best estimate they reasonably can of the value of their contents.” In the case of a contested claim, while the article stresses the importance of insurers asking the right questions and imparting the correct information when the insurance is put in place, the Financial Ombudsman will not simply find against an insurer because the insurer has not warned the customer that values can change over time. As the article points out “Gold costs more than it used to – and it would be a consumer’s responsibility to make sure their gold and jewellery is fully insured.”
Current and regular valuations are equally important as part of responsible asset management where values are changing in a global market in trading art currently estimated at 43 billion euros. Jewellery remains the most popular “treasure asset” – perhaps unsurprising with the rise in the number of female high net worth individuals and where, according to research from the World Bank, women now account for 80% of purchasing decisions. A recent article in The Times (“Handbags are out as jewels sparkle again”, 1 November 2014) quoted retailers including Boodles, Harrods and Bentley & Skinner as reporting a surge in demand from women buying jewellery in the £1,500 to £2,000 bracket. Online shops such as Sytlebop.com and Matches.com confirm the trend.
At the higher end of the market, certain categories of jewellery, such as coloured stones, have seen huge increases in price in recent years. According to the new Fancy Colour Diamonds Index, coloured stones have risen in value by 165% since January 2005.
Writing in The New York Times (3 October 2013), Conrad de Aenlle observed “As Art prices rise, the threat that collectors face in theft, fraud and physical damage tends to rise too.” As he goes on to explain, this is not simply because higher values mean more loss, but that there is also a greater incentive for criminals to steal, swindle or commit fraud. It is a sobering thought that after drug and arms trafficking, the trafficking of stolen art ranks third on the register of the world’s criminal activities.
Getting Correct insurance
Where insurance exists, the stark reality is that overvalued items result in higher premiums and disputed claims and undervalued items in financial loss once the loss adjustor has arrived on the scene. Many insurers offer products specially tailored for collections of fine art, antiques and jewellery. Many of these products represent exceptional value for money, but they will require regular valuations to reflect changes in the markets. Of course, the absence of a detailed valuation in the first place means the owner is at an even more serious disadvantage when negotiating with the loss adjuster.
There are a number of insurers who actively help their clients ensure that their contents are correctly insured. They may offer free appraisals on both contents and properties.
For more advice or assistance in ensuring your cover is correct, please feel free to contact Andy, Mary or Justin on 01438 350222 or email Andy, .