From Money Magazine, February 2005
A typical Australian house can cost over $200,000 to replace, but the typical Australian householder will have only $150,000 in insurance cover reports Terry Ryder.
The key message from research shows most of us are seriously under-insured. One survey has found 81 percent of households are under-insured by an average of 34 percent. Another suggests 24 percent do not increase their insurance cover following major renovations.
The impacts of under-insurance were highlighted by the January 2003 Canberra bushfires, when 488 homes were lost. The Australian Securities and Investments Commission says in a September 2005 report that those affected by the fires were under-insured by between 27 percent and 40 percent. "Many who lost their homes were unable to rebuild due to inadequate cover," says ASIC.
This serious gap between cover and cost results from a combination of factors. Unlike those in other countries, Australian building insurance policies place the burden of estimating rebuilding costs on the consumer.
Many home owners make a "guesstimate" of the rebuilding cost and guess wrong. Some rely on advice from the insurer but few insurers have reliable tools for estimating rebuilding costs. Other consumers deliberately under-price it because they can't afford full cover.
Some correctly estimate the house re-building cost but forget other issues such as demolition and debris removal (eg. following a fire or major storm damage).
Financial adviser and author Margaret Lomas says most are under-insured simply because they forget the cost of sundry smaller items that would be lost in a fire, such as groceries in the kitchen cupboards, clothing, cleaning products and equipment like vacuum cleaners. "When tragedy strikes you lose everything
," Lomas says. "A lot of people don't think of that."
But above all, property owners are under-covered because they arranged their insurance five or 10 years ago and have not adjusted it to reflect rising construction costs.
Bartlett says the biggest reason for under-estimating is the lack of reliable information. Insurance websites have calculators, but many fail the test because they provide simplistic cost-per-square-metre methods, rather than "elemental estimating" methods which include features such as sloping land and quality of finishes which can severely increase building costs.
So how do you work out how much insurance you need? ASIC's report is titled Getting Home Insurance Right
and that is what property owners need to do. The first step is accurately calculating the replacement cost of the house and everything in it.
Reed Construction Data has developed The Residential Building Calculator an elemental estimating method which asks people a series of questions about their home to create a realistic cost model. Bartlett says people can find it on the Reed web site, where there is a small fee to use it (around $35) and receive a report on their property.
Alternatively, five insurance companies AAMI, GIO, RACQ Insurance, Suncorp and Australian Pensioners Insurance Agency have bought licence rights to the calculator and make it available on their websites free of charge.
There is also a Contents Calculator to estimate the replacement cost of home contents.
Property owners need to keep in mind regional differences. Lomas says she recently built a four-bedroom, two-bathroom house on an investment property in Perth for $115,000. The same house in Sydney would cost twice as much.
Working out how much cover you need is only one issue. Property owners need to compare policies and premiums.
Consumers must decide also what conditions they are willing to take on. The premium will vary according to the conditions. "Some policies are the bare bones. They cover the catastrophes: fires, storms, earthquakes, that sort of thing.
"Then there is the blue ribbon cover where, for example, your contents are covered anywhere in the country if you're on holiday and the motel catches fire and damages your possessions, or if someone steal goods from your car. Different policies give different levels of cover."
Edwards says a good broker or insurance representative will cut through the maze of possibilities and advise property owners on the most suitable policies.
Lomas says owners need to ensure they have a new-for-old replacement clause. "Everything you have in reality might be worth only 20 percent of what you paid, but if you lose it all you won't want to replace it all with second-hand goods. So be very sure it has a new-for-old clause rather than a residual value clause where the insurance company can say the TV was worth only $100 because it was old."
For the complete story see Money Magazine's February 2005 issue. Subscribe now.
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