The True Cost Of Underinsuring Your Home Building And Contents
If you've ever been tempted to decrease the sum insured for your
home and contents in order to obtain a lower premium, think
again. You may end up paying a far higher price than you
imagined.
Whenever we take out an insurance policy, we are entering into a
contract with the insurer. Whether household, motor vehicle,
personal accident or any other type of policy, it is a legally
binding contract between the insurer and the insured.
For householders, insurance of home building and contents is
vital, not merely for peace of mind but to maintain the
lifestyle they are accustomed to if the unthinkable should
happen.
There are several aspects to consider when purchasing household
insurance.
* The insured has a duty to disclose to the insurer anything
that they know or could reasonably be expected to know is
relevant to the insurer's decision to accept the risk and, if
so, on what terms. For obvious reasons, this is called the Duty
of Disclosure.
* Each party to the contract (i.e.: insured and insurer) has an
obligation to each other in accordance with the clause of Utmost
Good Faith.
Utmost good faith means that in every dealing between insured
and insurer, all parties are obliged to act in a totally
scrupulous manner - that is: in a spirit of Utmost Good Faith.
This clause overrides all other clauses in the policy and is the
measure by which the majority of insurance disputes are settled.
* The sum insured is a major consideration when taking out an
insurance policy. It not only affects the cost of the premium
but the insurer's liability if a claim is made. For home
building and contents insurance, the sum insured is, arguably,
the most crucial aspect and the importance of "getting it right"
cannot be overstated.
According to The Insurance Council of Australia, approximately
43 per cent of home building and/or contents policyholders are
significantly underinsured.
Determining the Sum Insured
For many people, determining exactly how much to insure their
home building and contents for is a daunting task. It needn't
be, however, with a few guidelines to follow.
Most insurance companies offer replacement cover for household
policies - or "new for old" so it is important to insure the
building and contents for their full replacement value, not
their value after depreciation.
* Home building insurance: The sum insured is based on the total
cost involved in rebuilding the property to its original or a
comparative state. In addition to the actual building expenses,
this includes the costs of demolition and removal of debris as
well as any associated engineering, architectural and council
requirements. Consultation with a professional builder or
property valuer is recommended.
* Home Contents Insurance: The most effective way of determining
the sum insured for contents insurance is to conduct a
room-by-room inventory. Simply go into every room, listing the
individual items in each. Next to each item, write down how much
it would cost to buy that item brand new.
Most insurers provide literature, online information and
calculators to assist with determining sums insured.
As previously stated, the sum insured determines the insurer's
level of liability in the event of a claim. If the property is
underinsured, the result can turn an already traumatic event
into something more devastating.
Some insurance policies contain an "average clause" or
"co-insurance clause." What this means is that in the event of a
claim, if a property is found to be significantly underinsured,
the liability of the insurer will decrease commensurate with the
level of underinsurance.
Let's look at a hypothetical example without the average clause:
A home is gutted as a result of bushfire. There is nothing
retrievable. The homeowner had insured the building for
$200,000.00 and the contents for $10,000.00. When assessors
inspected the ruins and collected all the information about what
was lost, it was determined that the actual replacement value of
the building was $400,000.00 and for the contents, $20,000.00.
The insurer, however, was only obliged to pay a total amount of
$210,000.00, less any excess, and did this. The insured could
not rebuild for the amount of the claim payment and had to
settle for a much more modest home, fewer household contents and
a significantly reduced standard of living.
Let's look at another scenario with the average clause:
During a wild storm a tree falls onto a house, damaging the roof
and part of the living room. Again, the building was insured for
$200,000.00 and the contents for $10,000.00.
As in the previous example, loss assessors deemed the building's
actual value to be $400,000.00 and that of the contents,
$20,000.00. The cost to repair the living room and roof is
$30,000.00 and is well within the sum insured. However, the
insurer was only obliged to pay an amount commensurate with the
level of underinsurance.
The underinsurance level of the building was 50 per cent and so
the insurer paid 50 per cent of the repair cost - i.e.:
$15,000.00. Contents to the value of $8000.00 were also
destroyed during the incident, however, the insurance payment,
under the average clause, will be just $4000.00.
In total, the insurer paid $19,000.00, less any excess, when
repairs to the building and replacement of contents actually
cost $38,000.00.
These two examples highlight the importance of placing the
correct value on home building and contents insurance policies
and how decreasing sums insured to save a few dollars in premium
costs is really quite a gamble that could have disastrous
effects.
It far better to know that should an unfortunate incident occur,
we can recover what is lost.
After all, isn't that what insurance is all about?