Insurance valuations are important for property owners. Following the devastating Canberra bushfires in 2003, which destroyed hundreds of homes, the Australian Securities and Investments Commission (ASIC) conducted a study to evaluate homeowners’ insurance coverage. The research revealed that up to 81% of homeowners were underinsured, with their coverage falling short by an average of 27% to 40%.
‘It’s a tragedy to lose your home in a bush-fire, or any disaster, and only made worse if you are unable to rebuild because your insurance cover is inadequate’, ACT Regional Commissioner and Deputy Executive Director of Consumer Protection, Ms Delia Rickard said.
We have compiled essential information and practical tips to help homeowners make informed decisions about their insurance. Reviewing these insights can help ensure your coverage is sufficient to protect your home and financial security.
How does under-insurance occur?
Underinsurance can happen for several reasons. One major factor is the fluctuation in construction costs over time, while homeowners often review their insurance coverage only every few years. As a result, when rebuilding costs rise, the sum insured may no longer be sufficient to cover the full replacement of the home.
Another common mistake is calculating the insured value by taking the property’s sale price and subtracting the land value. This approach almost always leads to underinsurance, as it reflects the home’s indemnity value rather than its reinstatement cost (which we explain below).
It’s also crucial to understand that the sum insured is not the same as the market value of the property. Ensuring your coverage accurately reflects rebuilding costs can help protect you from financial loss in the event of a disaster.
Items often not considered
When determining the sum insured value, many homeowners overlook key costs beyond just rebuilding. These can include demolition and debris removal expenses, which are essential after a total loss. During the planning and construction phases, additional costs such as professional fees, development application fees, escalation costs, and the replacement of ancillary structures, such as gazebos, pathways, swimming pools, and retaining walls, can significantly impact the overall cost.
To avoid underinsurance, carefully review your insurance policy and Product Disclosure Statement (PDS) to understand what is covered under your sum insured.
How to ensure you have adequate coverage
Many insurance companies offer construction cost calculators on their websites, but it’s important to remember that these tools often provide broad estimates that can vary significantly between insurers. During ASIC’s study, they tested the calculators of nine different insurers and found that the smallest variation in rebuilding cost estimates was 42%, while the largest gap was a staggering 169%. In some cases, the highest estimate was more than two-and-a-half times the lowest estimate for the same house in the same location.
The best way to ensure your home is adequately covered is by seeking professional advice. Property valuers offer expert guidance and can help ensure the accuracy of your replacement cost coverage.
This sentiment is echoed by ASIC, with Ms. Rickard stating, “Estimating how much it will cost to rebuild your home is an extremely difficult task, and most consumers require expert assistance.”
At PPV Australia, we provide annual insurance valuations to help you avoid being underinsured.
Increasing the sum insured is too expensive
Increasing the sum insured will also increase the premiums. We understand many delay increasing the sum insured due to the cost of the insurance increasing. But remember, this defies the purpose of insurance – to cover you when you have a loss. Here are a couple of tips for easing premium costs:
- Customers can off-set the increase of premiums by lowering their excess.
- Shop around! I know you hear it a lot. But too often customers don’t do this. You’d be surprised how much you can save when getting a quote from a competing insurer.
Definitions
For the layman, it’s easy to get confused when jargon is used. Here are a few to clarify things:
- Sum Insured – This is the maximum amount your insurance company will pay in the event your home is destroyed. There is no guarantee the sum insured will cover the cost of rebuilding your home.
- Indemnity Value – The cost necessary to replace, repair or rebuild the asset insured to a condition equal to (but not better than) its current condition. It then takes into consideration the age, condition and remaining useful life of the asset.
- Reinstatement Cost – Where the building is destroyed, the cost to replace, repair or rebuild the asset insured, in a condition equal to (but not better than) its condition when new. Where property is partially damaged: the repair of the damage and restoration of the damaged portion of the property to a condition substantially the same as (but not better than) its condition when new.
We hope you found this article helpful. Take a look at our other blog posts on our website for more helpful information. Don’t forget to check out our valuation pricing.