When taking out a household insurance policy, consumers tell the insurer the value of the buildings or contents they want to insure. Following a household insurance claim, sometimes this amount - the "sum insured" - is not enough to cover the full value of the claim. This is referred to as "under-insurance".
In these circumstances, the insurer may not pay a claim, or "apply average" to the claim under an "average clause". This means that where the sum insured is inadequate, the insurer can reduce its liability for a claim by applying a proportionate approach. The sum to be paid out is usually calculated as follows:
(sum insured / true value) x loss = claim sum paid
For example - you need to claim for roof repairs £15,000, and your house is covered for a rebuild cost of £300,000. Its actual rebuild cost is £500,000 so the following applies:
(£300,000 / £500,000) x £15,000 = £9,000
This leaves a gap of £6000 which you may have to pay towards the repair.
You must insure for the full replacement cost of the contents of your home and the full cost of rebuilding your home including debris removal and site clearance.