The Insurance Council of Australia says that about 43% of people who have policies on their homes and/or their belongings are significantly underinsured.
Many people find it hard to figure out how much they should insure their home and its contents for. It doesn't have to be, though, if you follow a few rules.
Most home insurance policies cover replacement, or "new for old," so it's important to insure the building and its contents for their full replacement value, not their value after they've lost value.
Home building insurance: The amount covered is based on how much it would cost to rebuild the house to its original state or a similar one. In addition to the costs of building, this includes the costs of tearing down and cleaning up the mess, as well as any engineering, architectural, or council requirements that go along with it. It is best to talk to a professional builder or property valuer.
- Home Contents Insurance: A room-by-room inventory is the best way to figure out the amount of coverage for your home's contents. Just go into each room and make a list of the things in it. Write the price of a brand-new version of each thing next to it.
Most insurance companies have books, websites, and calculators that can help you figure out the sums insured.
As was already said, the amount of the claim determines how much the insurer is responsible for. If the property isn't adequately covered by insurance, a terrible event can be made even worse.
Some insurance policies contain a "average clause" or "co-insurance clause." This means that if a property is found to be significantly underinsured in the event of a claim, the insurer's liability will decrease in proportion to the level of underinsurance.
Let's imagine a situation without the average clause:
A bushfire burns down a house to the ground. There's nothing that can be done. The building was insured for $200,000, and the things inside were insured for $10,000. When the ruins were looked at and all the information about what was lost was gathered, it was decided that the building itself was worth $400,000 and the contents were worth $20,000.
The insurance company, on the other hand, was only required to pay a total of $210,000, less any deductible. The insured could not rebuild for the amount of the claim payment, so they had to settle for a much smaller home with less furniture and a much lower standard of living.
Let's look at another average clause situation:
During a bad storm, a tree falls on a house and damages the roof and part of the living room. Again, the building was insured for $200,000 and the things inside it were insured for $10,000.
As in the last example, loss assessors thought the building was worth $400,000 and the contents were worth $20,000. The cost to fix the roof and living room is $30,000. This is well below the amount insured. But the insurance company only had to pay an amount that was equal to the amount of underinsurance.
The building was only 50% insured, so the insurance company paid for half of the repairs, which came to $15,000. During the accident, things worth $8000.00 were also destroyed, but the insurance payment will only be $4000.00 because of the average clause.
The insurance company paid $19,000, less any deductible, even though repairs to the building and new items cost $38,000.
These two examples show how important it is to put the right value on your home's building and contents insurance policies, and how lowering the amount of coverage to save a few dollars on premiums is a risky move that could turn out badly.
It's much better to know that we can get back what we lose if something bad happens.
After all, isn't that the point of insurance?
