Whether by design or by accident, landlords are being left out of pocket by failing to take out adequate insurance cover.
“It’ll never happen” – so often famous last words and a regrettable delusion when things do go wrong, especially when it comes to property insurance cover.
Underinsurance is when a portion of a property has not been insured, or has been insured for less than it is worth. The Insurance Council of Australia (ICA) suggests that a property is underinsured if an insurance policy covers 90 per cent or less of the rebuilding costs.
Concerningly, underinsurance is rife in Australia. The David Murray Financial System Inquiry’s Final Report showed that 29 per cent of homeowners and 67 per cent of renters in Australia do not have any form of home and contents insurance. According to the ICA, eight in 10 homeowners and renters are underinsured for their home and contents, yet 83 per cent say they could not resume their same standard of living if their property was badly damaged or destroyed because they did not have enough insurance.
And people taking out landlord cover are not immune to the problem.
Having cover in place is invaluable when things go wrong, but policyholders need to understand that their insurer can only respond to a loss when the right type and amount of cover has been selected.
When taking out insurance, a landlord needs to determine what type of cover they need, for example a policy that covers the building, contents and tenant-related issues, or a policy that covers property damage and tenant-related risks but not the building itself, or a policy that covers a short-term rental.
In addition to having the right cover, it’s important to make sure that the insured value is enough. Many owners inadvertently find themselves underinsured simply by underestimating how much it would really cost to replace their investment property.
To limit the risk of being underinsured, the landlord needs to find out the exact value of their building and contents (current full replacement cost not the original purchase price) and nominate that amount in their application. The premium is based on the details provided in the application.
Spurred on by the notion “It won’t happen to me”, some owners choose to nominate a lower value believing it is a cost-saving – a move that inevitably turns out to be a false economy if they have to claim.
In one recent case that springs to mind, the owner of an investment property in country Victoria insured the home for $162,000, knowing that the sum was inadequate but remarking at the time: “It will be fine, it’s not like the house will catch fire”.
The house did in fact catch fire and was a total loss. The cost to re-build? $350,000.
In the event that a total loss claim occurs, the insurer can only pay to the maximum that the property and its contents have been insured for, in this case leaving the property owner out of pocket to the tune of $188,000.
“Sadly, incidents of underinsurance are most commonly picked up on large loss claims,” explained RentCover’s National Claims Manager Lush Edirisinghe.
“The ramifications of this can have lasting negative effects on property owners, ranging from putting them in large amounts of debt, to repairs never going ahead and the property just sitting there in its damaged state.”
To avoid finding out the hard way that they are underinsured, we recommend landlords and PMs do their homework when selecting a policy. Our team are always on hand to provide guidance.