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Insurance insights
Nominating The Right Sum Insured For Your Building
Managing Director - EBM Group
Sharon has worked in the insurance industry for close to 40 years, with three decades dedicated to working at EBM Group...
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 refer to the building sum insured, we mean the maximum amount payable under your insurance policy to repair or rebuild your property if it is damaged or destroyed by an insured event. This amount does not include the value of the land on which the property is located.
As the policyholder, you are responsible for selecting and nominating the building sum insured. Because our advice is general in nature and we are not property valuation or estimation specialists, we are unable to determine whether a particular sum insured is accurate or sufficient for your individual circumstances. For this reason, it is important that you carefully assess the cost of repairing or rebuilding your property and select a sum insured that appropriately reflects your needs.
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 actually 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, as well as its fixtures and features, 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.
It is important to note that some items commonly associated with the building, such as carpets, curtains and blinds, may be covered under a contents sum insured rather than the building sum insured, depending on the insurer and policy. Check your Product Disclosure Statement (PDS) to understand how these items are classified. Meanwhile, if you own contents at the rental property, such as appliances, furniture, furnishings or other landlord-provided items, you should also consider whether you need contents cover. In the event of a total loss, rebuilding the property may not replace these items, so having an adequate contents sum insured can help ensure they’re covered too.
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 landlord 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 (as higher sums insured generally lead to higher premiums) than they need to.
- Tenants may be entitled to a rent reduction.
- Rent may be suspended while the property cannot be occupied.
- Compensation arrangements may apply.
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 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 small, 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 rely on this indexation, but carefully review your sums insured on renewal.
What are the next steps?
A good habit to get into is contacting your insurer every 12 months (ahead of policy renewal) or when circumstances change to discuss your sums insured and 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.