You maybe surprised to know. 6 out of 10 home owners were underinsured in recent Cyclone & Fire events. What happens if your sum insured is inadequate?
You maybe surprised to know. If your home is destroyed by an insured event your Insurer MUST replace it new for old, but they don’t have to replace it if you are under insured.
How much it would cost to rebuild your home if it is destroyed or badly damaged by a fire, storm, or cyclone? The recent storms and bushfires we have experienced over the past years have bought to mind how important it is to sufficiently insure your valuable possession, the home. You must also take into account any freestanding buildings or infrastructures such as; garages, shade houses, fencing, landscaping, pools/spas, as they are also covered under your insurance policy.
What is an adequate Sum Insured? In general terms, most domestic home insurance’s work the same way. If your home is seriously destroyed by a fire, your Insurer will replace the home if you have insured it for an adequate amount. If the sum insured is inadequate then the Insurer doesn’t have to replace the home.
What is an adequate amount? If your home and contents are destroyed by an insured event your sum insured needs to include the following costs:
- The cost to remove all the debris from the block, knocking down walls that are structurally unsound, ripping up concrete slabs if damaged by intense heat, getting tip trucks in to cart all the rubbish away, paying the tip fees, etc.
- The costs to discharge mortgagees, re-designing fees for architects, costs for council fees to rebuild, etc.
- Extra costs of reinstatement – When you replace the home, some councils will require additional features not present in your current home to comply with current building codes. Water tanks, insulation, energy efficient appliances & double glazed windows are some examples. All these extra costs must be allowed for in your sum insured.
- If you live in the house, the costs to put you and your family up at an alternative residence (paying the rent/bond) for a maximum of 12 months whilst the Insurer is rebuilding the home.
- If you insure a rental property and lease it out, then your Insurer will pay Loss of rent which means you should specify a sum or incorporate in your sum insured.
- The costs for a professional builder to re-construct the home to the original design using new materials.
- Include an allowance of at least 20% for the inevitable increase in re-building costs that arises following a disaster, as tradesmen, materials and resources must come from out of the local area.
If your home burns to the ground, your insurer will NOT necessarily give you the Sum Insured in cash. First step is finding temporary accommodation for you and paying the rent so you have somewhere to live. Then they will move through the rebuilding process such as; clearing the block (removal of debris), discharging any mortgages, redesigning the home, and re-building the home. If they reach your sum insured stated in the policy they will STOP as their obligation under the insurance contract has been fulfilled. You may need to finish the home at your own cost.
Alternatively if you are inadequately insured you can ask for a cash settlement, however the Insurer doesn’t have to do this. If they agree, they will usually pay you the market value of the home, less the market value of your land. For example, if you home is worth $360,000 to sell on the market and of that the land value is say $200,000. The insurer would pay you $160,000. It is usually NEVER ENOUGH.
If you are unsure about the adequacy of your sums insured, the best, most accurate option is to employ a qualified valuer. They can provide an “Insurance basis of settlement” value for any property. For a less accurate, but free option, we have access to tools and guides which will allow you to “Do it yourself”. Some of our Insurers who specialise in “prestige” homes provide valuation services and guarantee the replacement of the home. Ask us if you qualify or any additional advice you may need.