Homeowners warned construction inflation could mean their property is underinsured 

If a home is insured for €200,000 but actually would cost €400,000 to rebuild, then it is only 50% insured. File Picture: Denis Minihane

Insurance companies are writing to households to warn them they may not get a full payout on a claim if their home is underinsured due to rising construction costs.

It comes after a review late last year by the Central Bank warning of underinsurance in the home insurance market more than doubling in recent years, from 6.5% in 2017 to 16.5% in 2022.

The Central Bank review also found that not all firms were sufficiently highlighting key risks to consumers and told them to take further action.

Construction inflation is playing a key role in driving this increase in underinsurance, as the cost of repairing or rebuilding has risen significantly since the onset of the war in Ukraine.

In one letter written by Zurich to a customer, it said if a person is underinsured and makes a claim for something covered under the policy, they may not receive the full amount needed to rebuild, repair or replace their home or its contents.

“We may reduce how much we pay on your claim up to the same percentage as you are underinsured, regardless of the size of your claim and even if it’s on your contents and personal possessions,” it said.

For example, if a home is insured for €200,000 but actually would cost €400,000 to rebuild, then it is only 50% insured. If damage was done to the home that would cost €100,000 to repair, only half of that would be paid out by the insurance company leaving the household exposed for the remainder of the cost.

The Central Bank encouraged consumers to check that they have adequate cover in place when renewing or switching their policy, advising they should not focus on the premium alone but also on the level of buildings and contents cover that is currently in place to ensure it remains appropriate.

It also said it expects firms to be proactive in ensuring customers are properly informed.

Colm Kincaid, the new director of consumer protection with the Central Bank, said: 'This is especially important at this time of increasing costs'.

Director of consumer protection Colm Kincaid said: “This is especially important at this time of increasing costs, which heightens the risk that consumers could be left without adequate insurance cover.” 

In the face of soaring construction costs throughout 2022, the Society of Chartered Surveyors of Ireland also issued a warning to homeowners that they could face being short-changed if making a claim when under-insured.

This week, Edward McAuley, Director of Practice and Policy at the SCSI, suggested that homeowners should look at indexation to make sure their home isn’t underinsured year to year.

“Homeowners should also enquire with their insurance provider about indexation which automatically increases the amount of buildings and contents cover when they renew their policy each year,” he said.

“It can help homeowners avoid being under-insured as it increases the cover they have in line with general inflation.”