It applies to you. How to solve it?

As property prices rise, the risk of underinsurance increases. This can have unwanted consequences for you, but I have some tips on how to deal with it and stay calm.

It is obvious that, for example, the tornado in Moravia has highlighted the need to have properly insured property. It is absolutely crucial to ensure that the property is not underinsured, meaning that it would be insured for less than its current value. It is not uncommon for the actual value of an apartment or house and the value stated in the insurance policy to differ by tens of percent.

If your property is not properly insured, i.e. underinsured, you are at great risk. If a catastrophe were to occur, the insurance company would pay you according to the amount of the sum insured stated in the contract, not the actual value of the property at the moment. This can lead to big problems, as in many situations it might not be enough to either compensate for the damage caused or to secure a new home.

This also applies to lesser claims, such as damage to home furnishings such as kitchen units. If the property is underinsured by 50 %, the payout from the insurance company could be up to 50 % less than the actual value of the damage.

Rising property prices cause underinsurance

There is nothing new in the fact that underinsurance of real estate is a persistent problem, which is exacerbated by the rapid rise in real estate prices in recent years. These prices can turn insurance policies taken out a few years ago into worthless paper, as the amount paid out, if necessary, might not be sufficient to cover the actual damage.

If the insurance policy was taken out several years ago, it may happen that, due to rapidly rising property prices, the value of the property increases many times and the insurance claim is no longer sufficient to cover the actual damage. So, for example, if you have an apartment insured for CZK 3 million, which is now sold for CZK 6 million, and the apartment suffers damage worth CZK 1 million, the insurance company will only pay out half of this amount because it is based on the value of the apartment on the date of the insurance policy. It is important to be aware of this fact and bear in mind that in such a situation the property is not fully insured. When you are buying a property that is mortgaged, at some stage in the transfer your property must secure this foreign debt. This lien is a right in rem, which means that the fate of the thing that is encumbered will be shared with the buyer and will pass to them along with the property.

Underinsurance can also arise from a desire to save

The increase in insurance coverage can be triggered not only by an increase in the market value of the property, but also by the renovation of the property or the acquisition of new and expensive appliances, which will be reflected in an increase in its current value. This must be taken into account when negotiating the insurance policy.

Other causes of property underinsurance include:

In order to save money, people may pursue the strategy of insuring their property at the lowest possible price, as the lower the value of the property, the lower the premium
However, when arranging a mortgage, the property is usually insured, but only up to the lowest amount, which ultimately leads to underinsurance
If the value of the property is incorrectly assessed, underinsurance will automatically occur

How to deal with underinsurance of the property?

Property underinsurance is easy to deal with - just regularly compare the insured value with the current price of the property. If these values differ significantly, it is necessary to agree with the insurance company to update the policy. It is recommended that this value update is done automatically every 2-4 years or the insurance company will contact you to agree new terms.

Ideal property insurance should include the following elements:

Property insurance should be absolutely comprehensive and should protect against all possible risks
It should be possible to change or update it at any time and without charge to reflect the true value of the property
The amount of the policy should correspond exactly to the real value of the property. The insurance should be endorsed without conditions and small print to make it clear what is included
The terms should be specified so that the insurer cannot refuse to pay the claim if the insured is entitled to receive it

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