James Daley

By James Daley

It may feel like an unwelcome expense when the bill comes in each year, but home insurance is a truly fantastic product. For a few hundred pounds, you can ensure that your home and everything in it is protected from the unexpected.

Most of us are fortunate enough to never need to call on it - or at least not for anything serious. But if your house burns to the ground, the cost of rebuilding it and replacing all your belongings can run to hundreds of thousands of pounds. Without an insurer ready to help you out, these kind of catastrophes would leave families destitute.

But imagine paying diligently for your home insurance for many years, only to discover that when you finally need to make a claim, you're still left thousands of pounds out of pocket. You'd rightly feel aggrieved. Yet the insurance industry leaves many thousands of families exposed to this risk every year, most of whom remain completely oblivious to the danger they're in.

The risk of guesstimation

The problem lies in estimating how much insurance you need. When you buy a home insurance policy, you're asked to decide how much it would cost to rebuild your home, and how much it would cost to replace all your belongings. Neither of these are straightforward.

Thankfully, when it comes to the harder task of estimating the rebuild cost of your home, there is some support. The Royal Institute of Chartered Surveyors offers a tool that estimates how much it would cost to build your home from scratch.

The problem here, however, is that insurers still tend to leave it up to the customer to decide how much cover they want - and in many cases, people confuse the market value with the rebuild cost. With property prices as they are - especially in London - the market value can be many multiples of the cost of rebuilding a property. So if you buy insurance to cover the market value, you could be paying many times over the odds.

The value of everything

More worrying of course are the cases where people don't buy enough cover - and this is much more common when it comes to insuring your contents. Most people have no idea what the value of everything in their home is. It's an almost impossible task to tot up the value of all your belongings - and to calculate what it would cost to replace each item. But that's what you need to do if you are to end up with the right amount of insurance.

Why does this matter? Because if you under-insure, the penalties are disproportionately high.

Let's say you buy £20,000 of contents insurance and your house gets burgled. The thief takes £5,000 of stuff, and when you make a claim, you get a visit from the insurance company. They take a look around your house and decide that your belongings are actually worth £40,000 in total. At this point, they argue that because you only had cover for half of your total belongings, they will only pay half of your £5,000 claim.

It's a perverse way of looking at the world. Most people would assume that if they've got £20,000 of cover, then any claim under that value would be paid in full. But that's not how insurers operate.

Insurers should bear the risk - not customers

I was renewing my home insurance just this week - and while on the phone to a friendly call handler at LV, I was asked what level of cover I wanted. She said that for a house of my size, £25,000 was usually enough. She was probably right. But what if she wasn't? It gave me enough pause to hang up the phone and run around my house trying to tot up the value of my stuff. But many people would breeze past this without understanding the consequences - especially when buying online.

Personally, I don't think it should be left to customers to make these kind of estimates. Sure, we should have to inform our insurer of any high value items we own - anything worth more than £1,000 - but beyond that, home insurers should be willing to cover everything else. Some families will have more stuff than others. So insurers should price in the middle. It just doesn't seem fair to leave it up to the customer to get the level of cover right. The financial consequences of them getting it wrong are too great.