Inadequate home insurance can lead to disastrous outcomes
Are you adequately insured? Relatively few homeowners are actually aware of the replacement cost of their home and the level to which their home insurance covers their property.
As we approach the warmer months, the looming threat of natural disasters such as fires and floods underscore the critical importance of ensuring proper insurance coverage for your property, be it residential, commercial or industrial.
In recent years, insurance costs have skyrocketed, with insurance companies grappling with premium hikes ranging from 50 to a staggering 400 per cent. This surge is attributed to significant natural calamities like cyclones, floods and bushfires, prompting the need for robust building insurance coverage like never before.
To address these challenges, some insurance providers have integrated automatic flood coverage into their policies. This inclusion serves to mitigate uncertainty during severe weather events, offering policyholders a sense of security regarding their coverage.
Many insurers are aligning their premium rates with flood map assessments, meaning that those dwellings in flood-prone regions are likely to face more substantial premium increases compared to those residing in safer areas.
In light of these developments, individuals faced with the task of rebuilding their homes following a natural disaster within an affected zone are confronted with a sobering reality.
Avoiding overpaying or underinsuring
The cost of rebuilding has surged by nearly 20-40 per cent in the last three years alone, beyond standard estimates for a typical residence. This increased expense stems from the necessity to adhere to stringent new regulations.
Gemma Gould, Director at eClaim, states that “Currently, it’s challenging to have conversations around reviewing Building and Contents Sums Insured given so many people are struggling with high interest rates, however, on the flip side, paying for an insurance policy that won’t financially restore you to the position you were in before a major loss is pointless.”
The pivotal question now arises as to who bears the responsibility of ensuring adequate property insurance coverage?
The answer is – you.
“The responsibility to adequately insure assets rests solely with the policyholder, so for this reason, sums insured should be reviewed and amended at least before every renewal period,” Ms Gould said.
“Ensuring that the sum insured adequately accounts for the costs of rebuilding and replacing your home and belongings falls squarely on your shoulders.”
It is not mandatory to have home insurance although, for new home owners, lenders will usually require a policy to be in place before a loan becomes unconditional.
Over-insuring a property can lead to paying unnecessarily high premiums, as your payout in the event of a claim is limited to the actual rebuilding cost.
The thing with being underinsured is, it could result in needing additional financing to reconstruct the house should it be completely devastated. This is probably something many individuals who have extensively renovated their homes and have continued to keep the same level of insurance instead of increasing the sum insured, haven’t addressed.
Vital insurance tools
To really understand the accurate replacement cost of your home, especially in areas vulnerable to natural disasters, it’s crucial to reach out to your local council and insurer. This proactive step ensures that your policy aligns with the true cost of rebuilding, eliminating the possibility of facing the heartache of not affording to reconstruct your home at its original location.
A Replacement Cost Estimate (RCE) is a vital tool for insurance purposes. It establishes the cost of rebuilding a property post partial or complete destruction. This estimate encompasses demolition, site clearance, waste removal, professional fees, compliance expenses, reconstruction costs, and can be adjusted for inflation.
In situations of partial loss, meticulous demolition becomes imperative to salvage the remaining structure, which can lead to more intricate and pricier procedures.
A qualified assessor, typically a quantity surveyor or property valuer, possesses access to a construction cost database and essential estimation techniques that are critical for determining the precise cost of construction – an essential factor for insurance needs.
It is important to differentiate this from a market valuation provided by a valuer. A valuation provided to a banking institute from a property valuer can significantly deviate from the actual construction cost, making it an unreliable basis for insurance assessments.
It’s important to understand that the insurance replacement cost outlined in a market valuation is not the property of the home owner. A valuation is typically ordered by the bank for the bank’s purposes and that document is not extended to any third party, including the home owner.
So, even if you did rely on that document, the valuation company take no responsibility for the sum insured being incorrect. It is important to get a specifically instructed RCE valuation report ordered.
While the cost of a Replacement Cost Estimate (RCE) is tax-deductible for commercial or investment properties, this benefit excludes residential homeowners who occupy their dwellings. Nonetheless, this expense offers peace of mind in the unfortunate event of a loss, proving its worth beyond short-term and relatively small financial considerations.
