The recent Perth Hills bushfires shone a light on Australia’s underinsurance problem. Don’t get caught short financially, use our tips to avoid finding yourself exposed if disaster strikes.
If disaster strikes you don’t want to be caught short
Bushfires engulfed the Perth Hills again last month, exactly 10 years after the debilitating Roleystone fires of 2011. At its peak, more than 500 firefighters battled the blaze along a front of more than 120 kilometres. The bushfire was still burning when the Insurance Council of Australia (ICA) declared it a catastrophe on 5 January as 11,000 hectares of land was burnt and 86 homes were destroyed.
The ICA estimated the value of the losses (for 270 claims) at over $40 million. That was the figure for insured losses – but much more will not be covered by insurance. While some people choose not to take out insurance, others will find they do not have enough to cover the value of items they’ve lost.
Underinsurance is rife in Australia. A survey by the ICA found up to 80% of homeowners and renters thought they might be underinsured for home and contents. Despite this, it is often when disasters occur that the full extent of the underinsurance crisis becomes evident.
Some policyholders deliberately underinsure their properties in a bid to reduce the premium – a move that inevitably proves to be a false economy if they have a big claim. Others simply aren’t aware their policy falls short of the real costs of rebuilding and replacing contents. In fact, the ICA estimates that more than 40% of households fail to correctly assess the value of their home and contents.
To help reduce the risk of being underinsured, talk to your EBM Account Manager who can help you determine the level of cover you need, and follow these tips for adequately insuring your property:
- Choose the right policy
Make sure that the policy actually covers the losses you need to insure against – councils and emergency management authorities can help identify risks (e.g. bushfire, flood, cyclone) in the area. For example, many policies do not include flood cover. You also need to take out the right policy for your circumstances, for example, if you are on a farm or run a business from home, a standard house and contents policy might not offer the right level of protection. And separate policies are generally required for vehicles, including cars, boats, trailers and farm implements.
- Ensure the building sum insured reflects current re-build costs
It is important to factor in current building standards and codes, especially bushfire attack level (BAL) requirements, as these can add substantially (approx. 20%) to building costs. It is particularly important to make sure that costs consider current requirements, particularly for buildings constructed before 2009 when the national building code was tightened around homes withstanding natural disasters. Costs will also be higher if the property is heritage-listed and must be restored. Also consider construction labour and material costs, which frequently spike immediately after a natural disaster as demand increases. The re-build costs may be very different from the re-sale/market value of the home. A quantity surveyor, builder or sworn independent valuer is best placed to determine these costs but there are also online calculators and smartphone apps that can assist.
- Don’t forget the external structures
Remember to include the costs to rebuild granny flats, sheds, carports, workshops, pool cabanas and other outbuildings. Also include adequate cover to reinstate fencing. Check if the policy offers cover for buildings within a specific distance of the property.
- Factor in the extra costs
Consider other expenses such as demolition, debris removal and architectural, engineering and council costs.
- Ensure contents are covered for full replacement
Most people underestimate the value of the contents of their properties. The sum insured needs to cover the costs to replace all the contents – from big-ticket items, like whitegoods and furniture, to everyday essentials like underwear, toiletries, and food. The replacement costs should reflect current prices (i.e. new for old) and doing a room-by-room inventory may help determine a realistic contents value (it can also help to have an inventory if you need to make a claim).
- Specify items
When insuring contents, you need to itemise valuables, such as artwork, expensive jewellery, designer items, collections etc., and you usually pay a premium to have these items covered. Most policies have sub-limits on sections of the policy (such as jewellery) which means items can only be covered up to the sub-limit unless they are specified.
- Don’t forget the outdoors
While many homes are often spared during bushfires, due to firefighting efforts, many outbuildings are not. Sheds, garages and equipment storerooms, especially on larger/rural properties where they are away from the homestead, are frequently razed along with their contents – like mowers, vehicles, (e.g. quad bikes, jet skis), sporting equipment, tools, garden supplies, and farm machinery.
- Understand the policy
Ensure you are aware of the policy limits and any exclusions as set out in the product disclosure statement (PDS) and Certificate of Insurance. For example, while policies are likely to cover loss or damage from fire, most do not provide cover for loss or damage where no flame was present, such as damage caused by scorching, melting, heat, smoke, ash, or soot. Also, be sure to understand the difference between a total replacement policy and a sum insured policy, and the difference between a defined event and accidental damage.
- Don’t set and forget
It is important to review the value of your sums insured each year so that the policy reflects current replacement costs. It is especially important to update the figures if you renovate or replace household items.
Being caught up in a bushfire is traumatic, finding you are also underinsured and unable to rebuild your premises can be devastating. Reduce your risk by ensuring you have adequate insurance cover for your building and its contents.
Should you have any questions or would like to review your insurances, please contact your EBM Account Manager on 1300 755 112.
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