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Five ways to avoid underinsurance

Australia’s horrific bushfire season has delivered a stark reminder to homeowners of the need to have adequate building insurance.

In the four months to January 7, 2020 insurers had already received 8,985 claims from the bushfire regions of NSW, Queensland, South Australia, and Victoria, with more expected to be lodged.

At that point insurance losses associated with the bushfire season were estimated at $700 million, according to Rob Whelan, chief executive, Insurance Council of Australia.

If that figure sends you scrambling for your policy documents it’s important to check that you not only have insurance, but also adequate cover.

According to the Insurance Council of Australia up to 80 per cent of homeowners would be unable to resume their normal standard of living if their property was badly damaged or destroyed.

You are considered underinsured if your insurance covers less than 90 per cent of the rebuilding costs.

So if you’re concerned your cover may fall short in the event of a claim, here are five things to check.

1. Don’t fudge it

The Council estimates up to 10 per cent of homeowners deliberately underestimate their building cover to lower their insurance premium. It’s a decision that may save you in the short-term and cost you in the long-term.

2. What is covered?

Most building insurance policies will cover you for a sum insured rather than total replacement value. When calculating the sum insured the cost of rebuilding is not the same as your home’s current value on the real estate market. If you have to rebuild, some of the costs that are easy to overlook include temporary housing expenses; the cost of demolition and debris removal; and drawing up and lodging plans with local council. These should either be covered by your policy or included in the sum insured. Check your policy fine print for your insurer’s stance on these costs.

3. What are local council policies?

Homeowners in bushfire zones can find they have inadequate cover because local council development controls require rebuilding to a higher construction standard.

4. Have you renovated?

Perhaps you took out a policy years ago and just keep renewing it annually. If that’s the case, think about whether the value of your home has increased over time. Likewise, the sum insured should reflect any major changes made to the house over the years such as renovations, installing a pool, and landscaping.

5. Calculate carefully

Not all calculators that help you decide on the sum insured are created equal. Some will be based on a cost per square metre, for example. The best calculators will take up more of your time, but they will come up with a more accurate estimate of the cost of rebuilding. Look for ones that ask lots of questions such as the age of the house; whether it is built on a slope; and the quality of the fixtures and fittings. Another way to come up with a more accurate figure is to get a professional valuation from a builder.