Tuesday, December 8, 2020

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Underinsurance in the Property Market: Do You Have the Right Cover?

Uncertainties in the property market brought about by COVID-19 have prompted many home owners to take a detailed look at their insurance policies, often for the first time. It’s usually not until a disaster occurs (e.g. a fire, storm or cyclone) that people realise they don’t have adequate cover. Underinsurance is an area often overlooked by property owners, but it has the potential to cause severe financial hardship if you need to make a claim. In this article, we’ll explain how this common issue occurs and what you can do to avoid it.


According to the Australian Securities and Investments Commission (ASIC), a home is underinsured when the insurance covers less than 90 per cent of the rebuilding costs.  It’s alarming that 1.8 million households don't have any home insurance at all, according to the Australian Bureau of Statistics, and for those with insurance, 80 per cent don't have the correct cover, according to the Insurance Council of Australia. This is a significant problem in the event of a claim because you would not be covered for the full cost of a total property rebuild. The following example illustrates the issue:

The Insured has undervalued their property replacement value by 50%. If they suffer a claimable loss, the Insurer can limit the settlement payable under the policy.

Full Replacement Value of your property = $1,000,000
Sum Insured under your policy = $500,000
Value of claim = $100,000
Amount payable by the insurer as a result of the application of the ‘Average’/’Co-Insurance’ clause (i.e. 50%) = $50,000


For most policy holders, this issue stems from a lack of information, rather than an intentional reduction in cover to save money on their premium. One of the most common causes of underinsurance is inaccurate building sum insured estimations, based on incorrect information such as initial building costs or using the market value of the property. For example, many insurance policy holders neglect to estimate on all components that are required when rebuilding a house. Often, the estimations do not consider the higher cost of building materials when compared with the original build and the additional services required for a total rebuild, including demolition costs and architectural fees.


Whether you have an existing policy, or you are looking to secure insurance, Honan recommends seeking an independent valuation of your property to ensure you’re covered for the correct amount. A property owner can also use an insurance calculator for a desktop estimation. The Insurance Council suggests policy holders can review their property on a room-by-room basis to assess their contents and use an insurance calculator to estimate the building sum insured amount. The insurance calculator is an estimate and is not intended to replace a professional valuation. Please feel free to reach out, Honan can refer you to our partnered valuers / quantity surveyors to assist you with this process.

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