by Greg Medcraft, ASIC Chairman
Many of you live in bushfire or flood prone areas. Do you have enough insurance to cover all the costs of repairing or rebuilding your home if it’s damaged or destroyed? Even if you’re renting, you should consider whether your contents insurance is sufficient.
Why you may be underinsured
You are considered to be underinsured if your insurance covers less than 90% of the rebuilding costs of your home.
You could be underinsured because:
- It’s hard to estimate what it costs to rebuild a home.
- Your policy may be old (more than 3 years) and you may not have updated your level of cover.
- You may have completed renovations, or recently bought jewellery or new electronic items.
To work out if you’re not adequately covered use the online calculators on insurance company websites to estimate the total cost of repairing or rebuilding your home, or replacing your possessions. Compare estimates from at least three calculators as the results can differ.
Check your policy now
Check to see how much your insurer will pay and under what circumstances. Does your policy cover the cost of rebuilding and any extra costs you might incur? Also check when your insurer will reject a claim.
Your policy will state what disasters you are covered for. Make sure you understand the definition of each term. If you’re unsure, ask questions until you’re satisfied you know what’s covered and what’s excluded.
In June 2012 a standard definition of ‘flood’ was developed for home and contents insurance, to give people more clarity when choosing cover. Insurers have 2 years to start using this definition, but can start using it now. Contact your insurer to find out if they are using the standard definition.
If you’re not happy with your current cover, talk to your insurer and see what they can offer. Shop around for a policy better suited to your needs.
Choosing contents insurance
The type of cover you choose will affect the premium you pay. Some policies cover you for defined events such as fire, while others cover you for any accidental event.
There are two main types of contents insurance:
- Policies that cover the value of your possessions.
- Policies that replace your possessions with new items e.g. ‘new for old’.
‘New for old’ policies tend to be more expensive. Work out what type of cover you want and weigh up the costs. You can save money by choosing a higher excess. For example, if you could pay the first $1,000 of any loss, the premium will be cheaper.
Policies with the lowest risk of underinsurance are ‘total replacement’ policies, where the insurer agrees to pay unlimited replacement costs.
Having your home or possessions damaged or destroyed in a natural disaster is devastating. If you’re not happy with your current level of cover, shop around for a policy that’s better suited to your needs. The golden rule is to get enough cover for the worst case scenario.
For more information, go to www.moneysmart.gov.au.