If having too little insurance is bad, then having too much is good, right? Wrong! Believe it or not, there is such a thing as being over-insured.
Wait, did you read right? An insurance provider telling you it’s bad to have too much insurance? Yes, you did.
It goes without saying that being under-insured is a bad thing. The Insurance Council of Australia estimates a staggering 80 per cent of property owners and renters are under-insured, which means they are likely to be left out-of-pocket if they suffer a loss.
However, you may not know that it is also possible to be over-insured. This is where the property is insured for more than it would cost to replace. Erring on the side of caution is wise when determining how much to insure your property (to ensure the value is appropriate), but overinflating the property’s value won’t do you any favours either.
So why is over-insurance a bad thing?
First, the policyholder is likely to be paying too much for their insurance. They’ll be paying an amount based on a higher figure than they could recoup, which is a waste of money.
But insurance companies would love policyholders to pay higher premiums based on an inflated value of their property, right? No. For insurers, over-insurance can constitute a ‘moral hazard’ for the company, because the policyholder may be tempted to make a false claim to profit from a loss.
In insurance circles, this is known as the f-word – fraud – and there are safeguards in place to discourage it from happening. Chief among those safeguards is the fact that most insurers will only reimburse policyholders for the actual cost of the loss they have suffered. When it comes to the physical property (building and contents), the value can be based on the total replacement costs or sum-insured, depending on the insurer. Where rental income is concerned, it is based on actual rent received.
Let’s break it down…
Let’s say you’ve insured the property for $1 million. If the property is a total loss, an assessor will determine the replacement cost, say $750,000, and the insurance pay-out will be based on that value, not the $1 million it is insured for. So in effect, although you’ve paid premiums based on the property being worth $1 million, in reality it is valued at $750,000, and that is all you will get from the insurer. You won’t pocket the extra $250,000. So you’ve paid more for no benefit.
Many insurers will have a clause in their policy that relates to over-insurance: “if you over-insure, we will not pay you more than it costs us to rebuild, repair, or replace. We will not refund any premium overpaid for over-insuring…”
Other insurance providers agree on the sum insured up-front – and will not usually permit property owners to insure a home for significantly more than its actual valuation.
When buying landlord insurance, the aim should be to purchase the right cover and at the right price. Here are some tips for determining the sum insured:
- Base the sum on the cost of replacing your building and contents on a new-for-old basis.
- Building sum should be based on current building costs, not market value. If you want precise rebuilding figures, ask a local builder or professional how much it would cost to rebuild your house.
- Do not include the cost of the land, just the property/structures built on it.
- Make sure you allow for current building standards to be implemented.
- Factor in structural improvements that have been made to the property, like sheds, pergolas and fencing.
- Include the cost of removing debris.
- Use replacement costs for the contents and remember that a landlord policy only covers the contents at the property, not the tenants’ belongings.
- Don’t forget GST.
- Use an online calculator (like the Cordell Sum Sure building insurance calculator on the ICA’s Understand Insurance website)… and compare the results from at least three insurance calculators.
*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 there, contact 1800 661 662 if you have any questions.
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