The current bushfire crisis sweeping across major parts of Australia is not only devastating to the people and animals living in the areas affected, but it is also going to have massive insurance implications for years, if not decades, to come.
Under-insurance is already a big issue in Australia, and once premiums increase in possible bushfire impacted zones, it’s going to get even worse.
Under-insurance is when you insure your asset for less than it will cost to replace.
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The hard part is, it can be difficult to know what the replacement value of your home is because the amount can be higher than its current market value.
The worst part is, when working out how much to value your home’s replacement value at, there is little to no guidance for everyday consumers who often can’t afford to use (or don’t know about) insurance brokers.
I recently shopped around for insurance on my home. It’s a four-bedroom house on a sloping block in a suburban neighbourhood. The suggested ‘replacement value’ to rebuild my house in the event of a fire or major catastrophe ranged from $600,000 to $1.3m!
I settled on a figure of $750,000, but I honestly have no idea if that would be enough to cover a rebuild.
And here’s the real kicker: if you under-insure your property, your insurer has the right to reduce your payout.
Basically, because you’ve only insured your home for part of what it’s worth, your insurer may have the right to pay only part of any loss.
Let’s say you’ve insured your home for $400,000, but its replacement cost is $500,000.
In this instance, you’ve insured the property for 80% of its worth, so your insurance payout in the event of a major claim may be reduced to 80% of your insured amount. This is just $320,000 – a far cry from the full $500k you’d need to rebuild.
It’s appalling that consumers are left to guess how much our homes are worth to rebuild – with only a call centre operator to assist, who has about as much knowledge around construction costs as we do – when the financial impact of under-insurance could be so devastating.
Moral of the story? It might be worth contacting your insurance company (particularly if you’ve renovated in recent months or years) to make sure you’re not under-insured.