With Australia facing increasingly frequent natural disasters and rising rebuilding costs, today we thought we’d discuss the important topic of underinsurance.
Researchers have warned that Australia faces an underinsurance issue, with many homeowners discovering they don’t have enough cover only after making a claim.
Federal MP Susan Templeman experienced this firsthand after losing her home in a bushfire in 2013.
Fortunately, her insurance payments were up to date. However, while her insurer agreed to pay the claim, they advised they would not fully rebuild the property because she was underinsured.
Although the property had been insured for its market value of $400,000, the actual rebuilding cost was approximately $600,000.
That shortfall created a significant financial burden and highlights a common misunderstanding around home insurance — market value and rebuilding costs are not always the same thing.
How are homes underinsured?
Many homeowners only discover they’re underinsured after a claim event occurs.
Online insurance calculators can be helpful starting points, however they often estimate based on property value rather than the true replacement cost of rebuilding.
Rebuilding costs can vary significantly depending on labour costs, materials, regional demand and regulatory requirements.
Some experts suggest building a reasonable buffer into your cover amount rather than relying solely on property market values.
How else could it affect me?
Chances are, if you haven’t reviewed your home and contents insurance for several years, you could be underinsured.
Home renovations, new technology, rising construction costs and lifestyle changes can all affect the amount of cover required.
Many Australians also have no home and contents cover at all, leaving themselves exposed to potentially significant financial risk.
How can I avoid underinsurance?
Here’s a quick checklist to see whether you’re sufficiently covered:
- Check your policy and speak with your insurer so you understand exactly what is covered and under what circumstances.
- Pay attention to clauses around bushfires, floods and other natural disasters, particularly if you live in higher-risk areas.
- Make sure all items are included — people often forget to account for renovations, jewellery, appliances and newer technology purchases.
- Consider the worst-case scenario. If your home and contents were destroyed, would your policy cover the full rebuilding cost using today’s construction prices?
- Review your cover regularly rather than setting and forgetting.
Final words
Your insurance requirements can change over time, particularly if you’ve renovated, purchased expensive items or experienced changes in property values.
If you haven’t reviewed your cover or home loan in a while, now could also be a good opportunity to complete a home loan health check and ensure your broader financial position is still working for you.
If you’d like assistance reviewing your options, our team can help with Home & Contents Insurance and other insurance solutions tailored to your needs.
