The nasty thing about underinsurance is that it will emerge to surprise you when you need bad news the least, causing a major financial and emotional headache when you are already under great stress.
Yet it is relatively easy to avoid if you spend a few minutes once or twice a year ensuring that the insurance cover for your home is appropriate and up to date.
There are also strategies you can take to increase your insurance cover in a more affordable way if you need to do so, such as increasing the basic excess on your insurance policy.
As Bill Stronach, Technical Specialist RACV Property Claims, puts it, the cost difference between having low insurance and adequate insurance is not always great.
“Increasing your sum insured – doubling your sum insured – it usually doesn’t double your premium,” he says.
The underinsurance of your home and contents is a big problem at any time but becomes an enormous one if you lose your home, such as in a fire or bushfire (what is called in insurance terms ‘a total loss’).
Most people understand that if you are underinsured it means you may not have enough insurance money to rebuild and replace back to the same standard you are at right now.
But it will also hamper your insurer’s ability to help you in the rebuild and replacement process, causing more stress and uncertainty for you and your family. In some cases it means you may be unable to rebuild your home at all.
The worst part of all this is that many don’t realise they are underinsured. They’ve taken out what was the appropriate level of home and contents insurance cover in the past, but have not regularly reviewed their level of cover since then.
But underinsurance happens over time. It happens because of renovations and improvements at your home or because of recent contents purchases, it happens because of changes in your lifestyle, it happens because of changes in the building regulations around you, and more.
If you don’t regularly review your home and contents cover – and it’s recommended you use the RACV insurance calculators as a start (racv.com.au/calculators) – there’s a good chance you could be underinsured.
According to industry body Insurance Council of Australia (ICA), more than four out of five Australian homeowners and renters have underinsured their home and contents.
To bring the issue closer to home, in the Wye River bushfire on Christmas Day 2015, 65 per cent of RACV members whose homes were destroyed were found to be underinsured – that’s two in every three RACV member homes.
Campbell Fuller, spokesman for Understand Insurance, the ICA’s financial literacy initiative, was not surprised by this.
“Underinsurance is a major problem in Australia,” he says. “After significant natural disasters, such as the Wye River bushfires, insurers find households that haven’t bought enough cover to fully rebuild or replace their home and contents and it makes an already distressing situation much worse.
“The insurance holder may be forced to borrow money or sacrifice size and features to rebuild their home on a smaller budget. In some cases they just can’t afford to rebuild at all.”
Andrew Dunn is an RACV member whose home was destroyed in the Wye River bushfires. While he was just covered for his loss, Andrew saw the difficulties of those who were underinsured.
“In Wye River I think there’s a significant number of people who are underinsured by substantial amounts, over $100,000,” he says. “Then they either can’t afford to rebuild or they have to rebuild a much smaller property to just get something back there.”
RACV’s Bill Stronach managed some of the claims from the Wye River event and felt the distress of those whose homes were destroyed.
“Usually they are in a state of shock and they have a lot of other issues they need to think about more than what is my house going to look like once it is repaired and rebuilt, or not repaired and rebuilt,” he says. “Overwhelming issues such as where am I going to live tomorrow, I’ve got to replace the kids’ school uniforms and things like that, so there’s an overload of stress.”
He also had to manage the claims of those who were significantly underinsured.
“It’s very difficult because a lot of what I do at RACV is based on the assumption that we can do something and we’ve got enough money to do it. We can provide a wonderful service and pretty much do it all for you, taking a lot of the stress out of the repair, rebuild and replacement process. If there are any unforeseen issues that crop up we can manage them for you because we often deal with the builder instead of you.
“But if you are underinsured we haven’t got the ability to manage in that way as we cannot start a repair or rebuild. When you are significantly underinsured our options are severely reduced and you generally get cash settled.”
A little underinsurance can mean compromises too, Mr Stronach says.
“One of the strategies here is we say, well look, you had a lovely big period Victorian home but unfortunately you were underinsured, perhaps we can explore an option to build a modern-style home which may be cheaper to build metre for metre – it may not be what you had but at least you are going to get a home.”
In metropolitan areas, Mr Stronach finds that it is often those who have had their insurance for a long time who turn out to be significantly underinsured. “Often it’s people who have been insured for longer – in the same home – and haven’t really thought about it. So they insured their home 20 years ago for an amount they thought was adequate at that time and have just relied on the CPI index increase over the years.”
In bushfire areas it can happen because of changes in building regulations such as bushfire zoning, says the Insurance Council of Australia’s Campbell Fuller. This proved a major problem in Wye River.
“Changes to bushfire zoning regulations brought in by state and local governments mean some older homes must now be rebuilt to a much higher standard than they were originally constructed. This can substantially increase rebuilding costs.”
Mr Stronach encourages anyone who hasn’t checked their home and contents insurance for a while to do so.
“Some people just don’t realise the cost of building a new house, that’s what it really comes down to. There are a lot of hidden costs. You really need to speak to RACV and talk to us about how much you are insured for.”
RACV Home Insurance is issued by Insurance Manufacturers of Australia Pty Limited ABN 93 004 208 084 AFS Licence No. 227678. This is general advice only so before making any decisions make sure you consider your own circumstances and the Product Disclosure Statement before buying. For a copy call 13 RACV (13 7228).
If you don’t list jewellery on your RACV Home Insurance policy as a ‘specified item’ or a ‘specified portable item’ it is covered up to $1000 in total, says Marita Pollard, Manager RACV Insurance Member Relations.
“A lot of people don’t do it, and when it comes to making a claim, they are not covered for their full jewellery items.”
Specified jewellery items are covered for a range of listed events within the home, but not for loss. As a ‘specified portable item’ jewellery is covered for loss and listed events inside and outside the home.
Failing to list your jewellery is not technically underinsurance, but it could mean that you miss out on being able to replace lost or damaged items.
What is underinsurace?
Underinsurance is when the insured value of your home and contents is less than the rebuild or replacement cost of your property. For home and contents you are generally deemed to be underinsured if your sum insured covers 90 per cent or less of the rebuild cost of your home and/or the replacement cost of your home contents.
How to ensure you are not underinsured
One of the best tips is to regularly use an online insurance calculator, says Insurance Council of Australia’s Campbell Fuller, as they give an estimate of rebuilding costs or the costs of replacing household possessions.
The RACV home buildings insurance calculator and home contents calculator are available at racv.com.au/calculators.
You also need to review your level of cover at least once a year, says RACV’s Bill Stronach.
“When you get your insurance renewal take 10 minutes and think about it. Think about what you like about your home, what’s special about it and how much is it going to cost to bring that special back.
“Ask yourself the question, ‘can I rebuild my house or replace my contents for that amount of money?’ Use the calculators and if you are not sure, ring RACV and talk to a consultant.”