Many homeowners believe that the most important aspect of a home insurance policy is the coverage it includes. Fire, earthquake, water damage, theft, and liability protection are usually the first factors considered when choosing insurance protection.
However, even a policy with extensive coverage may not fully meet the needs of a property if the insured amount has not been determined correctly. This is one of the most common issues we encounter in practice and one of the main reasons why underinsurance occurs.
Having worked with property owners in Greece and abroad, we often find that many people know what coverages are included in their policy, but far fewer understand how the sum insured is calculated and why it plays such a critical role in protecting their property. If you would like to gain a broader understanding of how home insurance works, this topic is an essential part of our complete guide to property insurance.
What Is the Sum Insured in Home Insurance?
The sum insured is the amount for which the building is insured. In home insurance, the sum insured is linked to the rebuilding cost of the property—that is, the cost required to repair or reconstruct the building in the event of a major loss.
This is a point that is often misunderstood. Many property owners assume that the sum insured should be equal to the property’s market value. In reality, these are two different concepts.
The sum insured does not represent the property’s sale value, nor does it include the value of the land. Instead, it reflects the building’s reconstruction value and the cost required to restore or rebuild it.
Market Value and Sum Insured: Two Different Concepts
One of the most common mistakes in home insurance is confusing market value with the insured amount.
Let’s look at a simple example. A 100-square-meter apartment in Kolonaki and a 100-square-meter apartment in Peristeri may have very different market values because of location, demand, and land value. However, this does not necessarily mean there is an equivalent difference in the cost of rebuilding the two properties.
Market value is influenced by factors such as location, views, neighborhood desirability, and land value. The sum insured, on the other hand, is based on the cost required to repair or rebuild the structure itself.
Understanding this distinction is perhaps the most important step in avoiding misconceptions about the protection provided by a home insurance policy.
How Does Underinsurance Occur?
Underinsurance occurs when a property is insured for an amount lower than what is required for adequate protection.
In such cases, compensation may be affected because insurers may apply the proportional settlement principle, under which claims can be reduced in proportion to the degree of underinsurance.
Underinsurance does not necessarily mean that a property is uninsured. It means that the insured amount may not fully reflect the property’s actual characteristics and reconstruction cost.
For this reason, avoiding underinsurance should be a key objective for any homeowner who wants their insurance protection to accurately reflect the true value of their property.
What Does Underinsurance Mean in Practice?
For many property owners, underinsurance remains a theoretical concept until they take a closer look at the details of their insurance policy.
In practice, the principle is simple: when the insured amount is lower than what is required for adequate protection, the overall level of insurance protection may not accurately reflect the property’s true characteristics.
This is why underinsurance should not be viewed as a theoretical issue but as an important factor within the broader framework of property risk management. Properly determining the sum insured is a key part of that process.
Why Underinsurance Often Goes Unnoticed
One of the reasons underinsurance is so common is that it often remains unnoticed.
Policies are renewed year after year, coverage remains active, and homeowners naturally assume their protection remains adequate. However, circumstances may have changed significantly without any corresponding review of the insured amount.
Renovations, upgrades, extensions, or increases in rebuilding costs can alter the property’s characteristics without being reflected in the insurance policy. This is why periodic reviews are an important part of effective property risk management.
A Common Example We Frequently Encounter
Imagine a homeowner who purchased a 120-square-meter property in 2012. At the same time, an insurance policy was issued based on the construction costs and assumptions of that period.
Over the years, the property underwent renovations, installations were upgraded, and construction costs increased significantly. Despite these changes, the insured amount remained largely unchanged because the policy continued to renew automatically without any meaningful reassessment.
This is a situation we frequently encounter in both primary residences and holiday homes. It is also one of the main reasons why reviewing the sum insured periodically is so important.
Why Rising Construction Costs Matter
In recent years, the cost of construction and property restoration has changed considerably. Building materials, labor costs, and technical services are all affected by market conditions that evolve continuously.
As a result, an insured amount that was perfectly reasonable ten years ago may no longer reflect today’s rebuilding costs.
Periodic reviews help ensure that insurance protection remains aligned with the property’s characteristics, current reconstruction costs, and present-day rebuilding value.
Underinsurance Is Not Limited to Luxury Properties
Another common misconception is that underinsurance only affects high-value homes.
In reality, it can occur in any type of property—from an urban apartment to a holiday home or an investment property used only part of the year.
At DF Advisors, we encounter similar situations across apartments, family homes, and holiday residences. Underinsurance is not a luxury-property issue; it is a matter of accurately determining the appropriate sum insured.
When Should You Review the Sum Insured?
A review is not necessarily required every year. However, it is sensible to reassess the insured amount in certain situations, including:
- After a significant renovation or upgrade.
- After an extension or addition of new living space.
- When several years have passed without a meaningful review.
- When construction and rebuilding costs have increased substantially.
In practice, many homeowners do not revisit their insured amount for years, even after carrying out improvements or renovations. Periodic reviews help ensure that insurance protection remains aligned with the property’s actual characteristics.
Proper Protection Is Not Just About Coverage
In home insurance in Greece for property owners living abroad, choosing the right coverages is only one side of effective protection.
It is equally important to ensure that the sum insured accurately reflects the property’s true characteristics. The effectiveness of an insurance policy depends not only on the coverages it includes but also on whether its core figures remain appropriate over time.
In practice, underinsurance is most often linked to an inaccurate or outdated insured amount. For this reason, periodically reviewing the rebuilding value of a property is an essential part of any comprehensive property protection strategy.
At the same time, the correct sum insured is only one aspect of protection. Equally important are the specific coverages included in the policy and whether they match the risks faced by the property. We will examine this topic in greater detail in the next article of our home insurance guide.
At DF Advisors, we often see that proper preparation and periodic policy reviews can be just as important as selecting the right coverages. Effective risk management begins long before an insurance claim ever arises.
FAQ’s
What is the sum insured?
The sum insured is the amount for which the building is insured and is linked to the cost of rebuilding or restoring the property.
Is the sum insured the same as the property’s market value?
No. Market value and the sum insured are different concepts and serve different purposes.
Why is the sum insured based on rebuilding cost rather than market value?
Because its purpose is to reflect the cost of rebuilding or restoring the structure. Market value is influenced by factors such as location, demand, and land value, which are not directly related to construction costs.
Is the value of the land included in the sum insured?
No. The sum insured relates only to the building and its reconstruction cost, not to the value of the land.
What is underinsurance?
Underinsurance occurs when a property is insured for an amount lower than what is required for adequate protection.
Can underinsurance affect claim payments?
Yes. In some cases, insurers may apply the proportional settlement principle, meaning compensation can be reduced according to the degree of underinsurance.
How is the sum insured calculated?
The sum insured is based on the rebuilding cost of the property rather than its market value. Factors such as square meters, construction characteristics, building quality, and other elements affecting reconstruction costs are typically taken into account.
When should I review my sum insured?
After major renovations, extensions, significant changes in construction costs, or whenever several years have passed without a meaningful reassessment.
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