Under insurance – a common phenomenon
Underinsurance is a very common phenomenon. After every significant flood or bush fire, the press is full of stories about people either not being insured or being underinsured. Eventually the subject dies till the next disaster strikes. If you can’t afford to lose something, insure it and if you are going to do a job, do it properly. By seeking advice from insurance professionals you are less likely to be caught out by being under insured.
Without advice you can take a guess at the replacement value of your home and contents then phone around to find the cheapest premium. The cheapest premiums are usually direct insurance sellers providing factual information only and you are unlikely to receive information on matters you do not ask direct questions about. Put the policy with the lowest premium in place and when disaster strikes, only then do you discover the shortcomings of your cover. A common cry, “No one told me I was only covered for flood if a floating item smashed a hole in my wall!” Along similar lines, “I was not told that flood cover was an optional extra!” Another common moan, “My lawn mower was stolen from the back yard and because it was not locked away, my insurance won’t pay.”
In a disaster situation in which a large number of homes and other buildings have been lost, the cost of replacement will usually increase dramatically due to a shortage of builders and building materials. Some insurance companies will allow a percentage increase over and above the insured amount to cover this contingency but many wont. With the exception of those companies providing the disaster cost increase, when you have exhausted your insurance amount, you are on your own.
Underinsurance. The best way to describe this is by example: Let us assume the cost of replacing your home contents is $200,000 but to save premium you only insure it for $100,000 anticipating that if you suffered a loss, you would not loose the whole lot anyway. You suffer a burglary and the thief gets away with $30,000 worth of your belongings. The insurance company appoints an assessor who discovers your under insurance. The insurer will take the view that you were only paying them sufficient to cover half the value of your contents and therefore you must be self insuring the remaining half. Under these circumstances, the insurance company would probably write you a cheque for $15,000 leaving you to replace the half that you had self insured from your own resources.
It should be noted that most insurers allow some leeway on your estimated replacement value and a common practice is to cover the whole amount of a partial loss provided you insured for a minimum of 80% of the total value. Be aware however that the insurer will not exceed the sum insured amount as a claim payment with the exception of the disaster percentage allowance mentioned above. This means that if you had your $400,000 home insured for $320,001 you are within the 80% range so averaging would not be invoked for a partial loss. If you suffered a total loss however, you would have to find the $80,000 payout shortfall from your own resources.
Ways to minimise your risk of underinsurance:
- Make use of home and contents calculators to work out the amount of cover you require. You can access our calculators here. A range of similar calculators can be found across the internet.
- Create a room by room inventory of all your belongings. This will help you work out how much it would cost if you had to replace the existing contents with brand new items.
- After completing a renovation, or replacing/upgrading household items, check to see if you still have enough insurance cover to account for these.
- Take into consideration that the resale value of your property may differ to the rebuilding cost (if your home is damaged or destroyed). This is due to the fact that the costs of building increase every year and complying with new building standards may also add to rebuilding costs. A professional valuer or builder can help you work our the cost of rebuilding your property to meet these new regulations.