Underinsurance is rife among Australian property owners, including landlords. According to the Insurance Council of Australia (ICA), eight in 10 owners are insured for less than their property and its contents would cost to replace.
What is underinsurance?
Underinsurance happens when the policyholder has insurance, but the limits of the policy are not enough to cover the cost of loss or damage to the property. The ICA suggests that a property is underinsured if an insurance policy covers 90 per cent or less of the rebuilding costs.
Depending on the cover, there are likely to be amounts listed for the building itself and for its contents. Again, depending on the policy and insurer, the amount set out will either be a predetermined figure or a figure nominated by the owner and agreed by the insurer – known as sum insured. Whether a set amount or nominated sum insured, these are the maximums that will be paid. So it’s imperative that they’re adequate.
What’s the issue with underinsurance?
When a property is underinsured, if there’s an insured event and the property is damaged or destroyed, the owner may not receive enough of a payout to repair the damage or rebuild. Remember, the figures set out in the insurance contract are the maximum that will be paid. Let’s look at an example…
Say the investment property is insured for $500,000. Tragically, a fire sweeps through the rental and it’s destroyed – a total loss. The insurer sends in an assessor (or loss adjuster) and they calculate that the cost to rebuild the property is actually $750,000. This means the property was underinsured by 50 per cent. The maximum the insurer is going to pay is $500,000 (as that is what the landlord paid for), so the $250,000 shortfall needs to be made up by the landlord.
If a property is underinsured, the owner is basically ‘self-insuring’ the difference. It’s on them to make up any shortfall.
How does a property end up underinsured?
Usually in one of two ways.
The first is where the policyholder intentionally underinsures the property. This is usually to save on the premium – the lower the sum insured, the lower the premium (typically).
The second is where the property is underinsured by accident. This usually happens because the owner fails to accurately estimate replacement costs. It’s not hard to do. Especially not these days. The cost of repairing and replacing property is steadily going up – the cost of raw materials is increasing, the cost of labour is increasing, the cost of goods are increasing – and it’s easy for estimates to become out-of-date. All costs need to be factored into the sums insured – and reviewed at least annually to make sure they remain current.
How to avoid the pitfalls of underinsurance
Having cover in place is invaluable when things go wrong, and policyholders need to understand that their insurer can only respond to a loss when the right type and right amount of cover has been selected.
Assess your risks
Identify the types of risks you are exposed to, the likelihood of these occurring and their potential impact. With this knowledge, you can look at how you will address the risks including taking out adequate insurance cover.
Determine the type of cover needed
It’s important to select a policy that’s suitable for the type of property and the way it’s rented. For example, you may need a policy that covers the building, contents and tenant-related issues (e.g. for a detached house), or a policy that covers property damage and tenant-related risks but not the building itself (e.g. for an apartment, flat, unit, townhouse), or a policy that covers short-term rental.
Ensure the sum insured is adequate
Remember that building costs and standards change, and you need to base your sum insured on the current building replacement cost.
The most accurate way to estimate rebuilding costs is to approach a quantity surveyor for a written replacement cost estimate.
When it comes to the sum insured for contents (if you need to nominate this), make an inventory of the property within the rental that you own and ensure the replacement costs are up-to-date (base the figures on new-for-old replacement). If the amount is pre-determined, check that the sums will be sufficient.
Review and update your policy
Regularly review the sum insured to make sure it remains adequate (and not just at renewal time, but if your circumstances change). If you renovate the property or upgrade any contents (like appliances), make sure you still have enough insurance cover to account for these improvements.
*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are here, contact 1800 661 662 if you have any questions.
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