Nominating the right sum insured for your building

If you own a rental property that requires building cover, you will likely be asked by your insurer to nominate the building sum insured. It is vital you get this dollar figure right, otherwise you could risk under- or over-insurance.  

When we talk about the ‘building sum insured’ we are referring to the total amount that you are covered for under your insurance policy to replace your property in the event of a total loss. You, the policyholder, are required to nominate the amount you want the insurance company to cover. It is not the insurer’s responsibility to make sure the sums are sufficient. So, how do you work out how much to nominate? And, why is it important you get this figure right? We explain…  

Why is the building sum insured so important?     

The sum insured amount is the MOST amount of money an insurer will pay for a loss. So, imagine your rental property suffers a fire and burns to the ground. The insurance policy you have has a building sum insured amount of $500,000 but it costs $750,000 to replace the building. Again, the sum insured amount is the MOST amount the insurer will pay out. This means there is a $250,000 shortfall, and it is one that the policyholder must pay themselves. That is why ensuring your sum insured is accurate, and stays accurate, is crucial.  

How do I calculate the sum insured? 

In terms of landlord insurance, the sum insured should cover the cost to fully replace your building if it is damaged or destroyed due to an insured event. You want to be able to recoup enough money to fully restore your home in the event of a total loss. Generally, the building sum insured should be based on the cost of replacing the building structure itself. Your policy will also likely include contents sums insured. This again will likely be variable amounts that you can nominate within the policy. Your sums insured must be adequate to cover the building and all contents fixtures and fittings including: 

• light fixtures,  

• built-in wardrobes, cabinets and shelving units, 

• bathroom fittings like taps and showers, 

• ceiling fans, 

• sheds,  

• decking, 

• fencing, 

• pools, and 

• driveways.  

You should also include an amount for other costs associated with rebuilding, like demolition and debris removal, and architectural, engineering, surveying and construction fees. The building sum insured should not include the value of the land the property sits on.  

The biggest mistakes policyholders make when it comes to the sum insured…  

Usually, the policyholder nominates a sum insured that is too big or too small. This runs the risk of under- and over-insurance.   

• Under-insurance – as touched on, if you nominate a sum insured that is not enough to cover the loss (e.g. you nominate the sum insured of your property to be $200,000 when it is really $300,000), then you are under-insured and will be left to find the money to make up the shortfall if the home is a total loss (in this case, $100,000). 

• Over-insurance – nominating a sum insured that overinflates the replacement value of the home is problematic too. If a claim is made, most insurers will only pay the policyholder for the actual cost of the loss they have suffered. For example, if you nominate a sum insured of $300,000 but it only costs $250,000 to replace the property back to its original state, the insurer will typically only payout the $250,000 (you won’t get $300,000 then be able to pocket the additional $50,000 that isn’t used to restore the property). This is a problem as the landlord is ultimately paying a higher premium than they need to. 

Getting help…  

You will get the most accurate sum insured cost by engaging a quantity surveyor to work out the replacement figures. If you do not want this expense, there are online calculators you can use to help determine appropriate sums insured. The Insurance Council of Australia website has building calculators available. 

Should the building sum insured amount change?  

The sum insured you nominate when you apply for cover may not be sufficient upon renewal. The cost to rebuild or replace your property may be higher, or maybe you have renovated the property, adding extra value that needs to be covered. To ensure your investment remains well protected, take the time to review the sums insured nominated in your policy. Re-assess the sums and be sure that they reflect current replacement costs.  

Does the insurer factor in inflation? 

As mentioned, it is not the insurer’s responsibility to make sure the policyholder has enough cover – it is up to the policyholder to check they are adequately covered. However, what some insurance providers do, including EBM RentCover, is automatically update building sums insured upon renewal (this is called indexation). What this means is that the insurer increases the building sum insured by a fixed percentage on renewal to help align it with the Consumer Price Index (CPI). While this provides some additional protection against inflation, it may not be enough to cover the real increased cost and the impact on your sums insured. So, you shouldn’t solely rely on this indexation, but carefully review your sums insured on renewal. 

What are the next steps? 

A good habit to get into is reviewing your policy every 12 months (ahead of policy renewal) or when circumstances change to ensure your sums insured are correct and/or make any necessary updates.  

With prices ever-rising, it could be easy to find yourself under-insured simply because the sum insured is no longer enough to cover the costs if your property was damaged or destroyed.  

The idea of being out of pocket on your investment property is the kind of thought that can keep you awake at night. We know that calculating the building sum insured could be daunting, particularly if it is something new for you, so you can always reach out to a member of our Expert Care team for some guidance – 1800 661 662.