Home Insurance: Buildings vs Contents and Underinsurance

Home insurance in the UK is split into two distinct products: buildings insurance and contents insurance. You can buy them separately or as a combined policy. Most mortgage lenders require buildings insurance as a condition of the loan, but contents insurance is always optional. The single most common mistake homeowners make is insuring for the wrong amount, which can reduce payouts dramatically when you claim.

Buildings Insurance

Buildings insurance covers the permanent structure of your home: walls, roof, floors, windows, doors, fitted kitchens, fitted bathrooms, and permanent fixtures such as built-in wardrobes. It also typically covers garages, outbuildings, boundary walls, fences, driveways, and underground pipes and cables.

The sum insured should be the rebuild cost, not the market value of your property. The rebuild cost is the amount it would take to demolish and reconstruct your home from scratch, including site clearance, materials, labour, and professional fees. For most standard houses, the rebuild cost is significantly lower than the market value because the market value includes land, location, and demand factors that are irrelevant to reconstruction.

The Royal Institution of Chartered Surveyors (RICS) provides a free online Building Cost Information Service (BCIS) calculator that estimates rebuild costs based on your property type, size, and location. For non-standard properties, period homes, listed buildings, or homes with unusual construction, a professional rebuild cost assessment by a chartered surveyor is advisable. Getting this figure wrong has serious consequences, as explained below.

Contents Insurance

Contents insurance covers moveable possessions inside your home: furniture, electronics, clothing, jewellery, appliances, and personal belongings. It typically covers theft, fire, flood, storm damage, and accidental damage if you add that option.

The key distinction is between new for old andindemnity cover. New for old replaces a damaged or stolen item with a brand new equivalent at current retail price. If your five-year-old television is stolen, you receive enough to buy a new one of equivalent specification. Indemnity cover deducts for wear, tear, and depreciation, so you receive what the old item was worth at the time of the loss. New for old is the standard on most modern policies, but check your schedule. Indemnity cover pays significantly less.

High-value single items, typically above £1,000 to £2,000, usually need to be specified individually on the policy. Jewellery, watches, art, musical instruments, and bicycles are common examples. Failing to specify them can mean they are excluded or subject to a lower single-item limit.

Most contents policies also offer personal possessions cover as an add-on, which extends protection to items you take outside the home. Without it, your contents cover only applies inside the insured property.

Underinsurance and the Average Clause

Underinsurance is the most damaging mistake in home insurance, and most homeowners do not know the risk until they claim. If you insure your buildings or contents for less than their true value, the insurer can apply the average clause (also called the condition of average). This reduces your payout proportionally.

For example, if the true rebuild cost of your home is £300,000 but you insured for £200,000, you are insured for two-thirds of the correct amount. Under the average clause, the insurer will pay only two-thirds of any claim, even a partial one. A £30,000 kitchen fire claim would be settled at £20,000. You would bear the remaining £10,000 yourself.

The same principle applies to contents. If you estimate your contents at £30,000 but the true replacement value is £60,000, every claim will be halved. Regularly review your sum insured, especially after renovations, extensions, or significant purchases.

Flood Risk and Flood Re

Flooding is a growing concern in the UK, and properties in high-risk areas have historically faced either very high premiums or outright refusal of cover. The Flood Re scheme, introduced in April 2016, was designed to address this.

Flood Re is a reinsurance fund backed by a levy on all UK home insurers. When an insurer covers a property at high flood risk, it can cede the flood element of the premium to Flood Re at a capped rate based on the council tax band of the property. The caps range from £52 per year for Band A properties to £540 per year for Band H. This makes flood cover affordable even in the highest-risk locations.

Not all properties are eligible. Flood Re covers residential properties built before 1 January 2009. Properties built after that date, buy-to- let properties, commercial premises, and properties in council tax Band H (not council tax band but leasehold blocks with more than three residential units) may be excluded. Check your insurer's position if you are in a flood-risk area.

You can check your property's flood risk for free using the Environment Agency's flood risk map for England, Natural Resources Wales for Welsh properties, and SEPA for Scotland.

Subsidence

Subsidence, the downward movement of the ground beneath a building, is covered by most buildings insurance policies. The standard excess for subsidence claims is £1,000, which is significantly higher than the excess for other perils. Claims typically involve monitoring the movement over several months before remedial work is approved.

If your property has a history of subsidence, you must disclose this when applying for insurance. Previous claims will be visible on the Claims and Underwriting Exchange (CUE) database, which insurers check as standard. A subsidence history can make insurance more expensive or limit the providers willing to offer cover, but specialist insurers exist for this market.

Common causes include tree root damage (particularly from oak, willow, and poplar trees), clay soil that shrinks in dry weather, and leaking drains that wash away supporting ground. If you notice cracks wider than 3mm, particularly diagonal cracks around windows and doors, report them to your insurer promptly. Delay can worsen the damage and complicate the claim.

Complaints and the Financial Ombudsman

If your home insurer rejects a claim, offers an unreasonable settlement, or handles a claim poorly, you have the right to complain. Start with the insurer's internal complaints procedure. The insurer must respond within eight weeks.

If you are not satisfied with the response, or if eight weeks pass without a final answer, you can escalate to the Financial Ombudsman Service (FOS). The FOS is free for consumers and its decisions are binding on the insurer up to the current compensation limit of £430,000 for complaints about acts or omissions on or after 1 April 2024.

Common home insurance complaints upheld by the FOS include unfair application of the average clause where the insurer did not clearly explain the requirement, unreasonable delays in settling claims, disputes over the scope of cover for storm damage versus wear and tear, and disagreements about the cost of reinstatement works.

Home insurance protects your largest asset and everything inside it. Insure buildings at rebuild cost, not market value. Insure contents at full replacement value and specify high-value items. Review both figures annually. If you are in a flood-risk area, check your eligibility for Flood Re. And if a claim goes wrong, the Financial Ombudsman is there to ensure fair treatment.