81% of Australian homeowners and renters are underinsured1. Don't let this be you - make sure you're protected.
In 1999, a hailstorm dropped 500,000 tonnes of hailstones over Sydney, creating damage totalling around $2.3 billion. Unfortunately, only $1.7 billion of this damage was insured. This was the most expensive storm in Australian history with regards to insured damage, but thousands of people still ended up having to use their own money to cover the cost of the damage done to their homes, cars and possessions. Find out what being underinsured could mean for you below - and how you can protect yourself.
1 Source: Insurance Council of Australia, Understand Home Insurance Research Report, published August 2014
What is underinsurance?
Underinsurance is when someone does not have adequate insurance to cover the cost of damage or loss to their property or possessions.
Your home is probably your most valuable asset. That’s why it’s especially important to ensure that you have enough insurance to cover you if something bad were to happen to it. Having your house underinsured in the event of a natural disaster (which is, unfortunately, a common occurrence in Australia) could result in having to pay out substantial sums of money and could be financially crippling.
Am I at risk?
There are a number of reasons why you might be underinsured, but the most common is simply inaccurate insurance. Here are a few tips to ensure you have adequate cover:
- Keep track of your policy. Check your policy every few years and make sure that it still covers you completely, especially if you’ve renovated or purchased new furniture. Your insurance may no longer cover the complete cost of rebuilding if your property value has increased.
- Note your neighbourhood value. If your neighbourhood has begun to increase in value, this may have pushed the value of your house up. If so, your insurance policy might also need to increase. If your insurance policy is reflective of the property’s value when you bought it as opposed to what it is valued at today, the house is most likely underinsured.
- Don't cut corners. Another common driver of underinsurance is an attempt to save money. Some people believe a comprehensive home insurance policy is too expensive, but the cost of being underinsured could be far greater down the track if an unexpected disaster means that you’re starting from square one.
- Cover everything with a high replacement cost. You might have building insurance for damage to the structure of your property, but some people choose not to cover their contents. You might not think that you have much of particular value, but consider the cost of replacing every single thing in your house, such as in the case of a fire or a flood, and it really adds up. For instance, people might forget to include the price of fittings, carpets or curtains.
Being underinsured might not be intentional. Many people simply underestimate the value or miss out on whole categories of items when giving an estimate.
What happens if I am underinsured?
If you’re underinsured and in a position where you have to make a claim, you won’t receive the full cost for the damage done. The settlement you’ll receive for a claim on underinsured property will be according to the actual sum insured. You will then have to cover the rest of the cost from your own pocket.
How do I prevent it?
The number one trick is to check your insurance policy, your coverage levels and whether you have complete comprehensive cover. Even if you don’t renovate your home, or increase the value of your belongings, you should still review your policy at least every three years. Before taking out a new policy, ask for advice from an insurance broker since they can advise you on whether you need to get your property valued before choosing a policy.
Even if you don’t renovate your home, or increase the value of your belongings, you should still review your policy at least every three years. Before taking out a new policy, ask for advice from an insurance broker since they can advise you on whether you need to get your property valued before choosing a policy.
What is an underinsurance clause?
No matter what policy you take out, you should always check for an underinsurance clause as this will also affect how much you pay.
In the case of partial damages where you only need a portion of the cost of rebuilding covered, an underinsurance clause in your policy can result in your insurance provider only covering part of those costs. These are generally put in place to reward policyholders with complete or comprehensive cover and to discourage people from taking out partial or incomplete insurance.
What kind of benefits does comprehensive insurance have here?
Comprehensive insurance offers peace of mind for policyholders. Even though it will mean more in insurance premiums in the short term, it means that you won’t ever be in a position where you need to cover the excess on a claim, especially at a time that might already be emotionally or financially difficult (such as in the event of a natural disaster).
If you keep up-to-date with comprehensive cover by reviewing it every few years, you will never have to worry about covering the shortfall out of your own pocket.