What does underinsurance mean? How to know if you're underinsured

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RACV staff

Posted June 22, 2022


Underinsurance is a major problem in Australia. If you’re underinsured, you may be at risk of financial loss when an unexpected insurance event occurs such as fire, storm and theft, and you need to rebuild your home or replace contents. Here’s how to understand if you’re underinsured, and what to do about it.

The nasty thing about underinsurance is that you don’t often know you’re underinsured until it’s too late, potentially causing a major financial and emotional headache when you are already under great stress.

Victims of major events such as fire, storm damage or theft might have taken out what was the appropriate level of home and contents insurance coverage at the time but have not regularly reviewed their level of insurance coverage since, only to find out they’re underinsured when they need their home and contents insurance policy the most.

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What is underinsurance?

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, the Insurance Council of Australia (ICA) defines underinsurance when the sum insured covers 90 per cent or less of the rebuild or replacement cost of your property. This will hamper your insurer’s ability to help you in the rebuild and replacement process, and in some cases, may mean you are unable to rebuild your home at all.

The vast majority of Australian households are underinsured. The Australian Securities and Investments Commission (ASIC) states that up to 80 percent of homeowners are underinsured.

“Underinsurance is a major problem in Australia, particularly given the prevalence of natural disasters,” says Kirsty Hayes Head of Home & Business Insurance at RACV.

“After a bushfire or flood, a home can become a total loss, whereby the home needs to be completely rebuilt, or majority of the contents need replacing. In this situation, if the household doesn’t have sufficient home and contents insurance coverage to fully rebuild or replace contents, it makes an already distressing situation much worse.”

“It may even mean the home can’t be rebuilt to the same size or quality, or that the homeowner is forced to borrow additional funds to rebuild the home or replace their contents,” Hayes adds.

Who is likely to be underinsured?

Hayes says that those who have had home insurance coverage in place for a while without making any updates are likely to be underinsured.
 
“Underinsurance can happen over time. It often occurs to people who have been insured for a long time in the same home and haven’t really thought about their insurance coverage since," says Hayes.

"It could be that homeowners may have adequately insured their home and contents 10-20 years ago but have just relied on a CPI indexation increase applied to the home insurance policy in the following years.”

In bushfire areas, underinsurance can happen because of changes in building regulations such as bushfire zoning, explains Hayes.

“Changes to bushfire zoning regulations brought in by state and local governments mean that some older homes must now be rebuilt to a much higher standard than they were originally constructed. This can substantially increase the cost of rebuilding the home.

“Some homeowners don’t realise the cost of building a brand new house. Inflation, supply chain issues, building material shortages and surging labour costs mean the cost of rebuilding a home has increased significantly over the past few years, so it is important that homeowners are regularly reviewing their home insurance coverage."  

 

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Moving house is a great time to take stock of your contents and ensure it is properly protected.


Common causes of underinsurance

While there are multiple factors that lead to underinsurance, one of the more common ones is guessing how much it would cost to rebuild or replace a home, rather than contacting professionals such as builders and valuers, or using a building calculator as a guide.

Other reasons for underinsurance include not accounting for upgrades to the home as well as accumulated assets, increased building costs like materials, labour or updated building codes, and supplementary costs like demolition, clean up, council applications, surveyors and architects.

While some insurers may cover this as part of their standard policy, it is important people double check their insurance policy regularly to ensure underinsurance does not occur.

Underinsurance can also occur due to marriage, arrival of children and changes in lifestyle.

What household items may be underinsured?

While sentimental items such as watches, jewellery and family heirlooms might immediately spring to mind when considering home and contents insurance policy coverage, these items may still be underinsured because some policies have limits, or require items to be specifically listed on the policy.

If the home insurance policy limits aren’t increased, the standard coverage may not be enough to cover high value items like engagement rings, or watches, laptops, tablets and even expensive items of clothing, leading to underinsurance.

“A lot of people don’t increase their home insurance policy limits. So, when it comes to making an insurance claim, they are not covered for their full collection of home contents,” says Hayes.

Some insurers may offer optional portable insurance coverage to extend protection for things like jewellery, technology and clothing outside the home.

How do I know if I'm underinsured?

One of the best ways to safeguard against underinsurance is to engage with professionals, such as builders and valuers, to get an estimate of the costs involved in rebuilding a home.

Regular use of an online buildings insurance and home contents insurance calculators can also help you gauge home rebuilding costs and the costs of replacing household possessions.

“When you get your home and contents insurance renewal notice, take 10 minutes and to 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,” says Hayes.

“Ask yourself: ‘Can I rebuild my house or replace my contents for that amount of money? If you're not sure or the answer is no, it’s time to review your home insurance policy.”
 


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The information provided is general advice only. Before making any decisions please consider your own circumstances and the Product Disclosure Statement and Target Market Determinations. For copies, visit racv.com.au. As distributor, RACV Insurance Services Pty Ltd AFS Licence No. 230039 receives commission for each policy sold or renewed. Product issued by Insurance Manufacturers of Australia Pty Ltd ABN 93 004 208 084 AFS Licence No. 227678.