Getting your insurance coverage right: have you done your sums?
By Tammy Holzheimer – Solicitor-Director, Commercial Property Law
15 November 2017
House fires, bush fires, flooding or man-made losses, such as theft of livestock or machinery or damage to property – the odds are that most rural residents will experience the effects of at least one of these over their life time.
Unfortunately, some will find out the hard way they may not get full coverage under their insurance policies for home / farm. It’s crucial you ensure you have adequate insurance coverage and that means doing your homework when you’re preparing to take out a new insurance policy or are renewing an existing policy.
Understand the implications of an indemnity insurance policy
Our firm has been consulted over the years by a number of clients whose older houses have been destroyed by fire. When they lodged a claim, they received a lesser amount than the insured value, because the policy was an indemnity policy.
Under an indemnity policy the insurance company depreciates the value of the replacement building or item depending upon its age.
For example, if your house was insured for $100,000 and the cost of replacing the house is $100,000 then the indemnity policy provides that the insurance company can depreciate the value of the house by multiplying the age of the house by one per cent. If the house was 64 years old, then the amount payable under the policy would be the replacement value of $100,000, less depreciation of 64 years multiplied by one per cent, or a final amount of $36,000 after depreciation.
We would encourage you to check your policy and, if it’s an indemnity policy, consider changing it to a replacement (or reinstatement) policy. A replacement policy is especially important for older houses such as farm houses.
Farmers and people in rural country towns are often the owners of houses more than 60 years old, which are serviceable, but if destroyed could not be replaced for the reduced sum under an indemnity policy.
Beware of under insurance (co-insurance clause)
This happens when the replacement cost exceeds the sum insured. A typical co-insurance clause provides that if you undervalue your property by more than 20%, the insurance company will pay a proportionally lower sum for any claim.
The following example highlights what can when the replacement cost of a house is $450,000 but it is insured for only $300,000.
If half of the house is destroyed in a fire and will cost $225,000 to replace, allowing a typical 20% buffer for underinsurance the owner will only receive $180,000, even though the insurance coverage is $300,000 (75% of the full replacement cost).
It’s important that your sum insured reflects the true replacement cost of your property, regardless of what you believe your property is worth or what you paid for it.
Regularly check the replacement costs of building a home. When calculating the replacement costs, fixtures such as carpets, light fittings, hot water services, fences and driveways should be taken into consideration.
Most insurance agencies have a home buildings or home contents calculator option on their website which you can a get a figure against which to double check your sums.
Read the fine print – Terms and Conditions – of your policy.
Generally insurance policies would not cover damage caused by war, nuclear explosion, flood and the unnecessary application of heat. Cover for flood damage is sometimes available at extra cost, but in flood prone areas it may be too expensive or simply unavailable.
Home owners with a house located in an area which is subject to potential problems such as flooding or fire, should check the terms and conditions of the policy with their insurance agent or broker.
If you have any questions, please contact us to book an appointment on 1800 643 779.