The risks of underinsurance
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.
Bought a dud consumer product? Your consumer rights
The final article in our 3-part series on consumer products
This article gives you a brief overview the remedies and may be available to you under consumer guarantees if you purchase a product that turns out to be defective.
Consumer guarantees are a set of rights and remedies that apply across Australia, under the Australian Consumer Law (ACL), to most consumer products you buy.
These rights exist separately from and in addition to any ‘warranty’ or ‘guarantee’ offered to you by the seller or manufacturer of the goods.
When am I entitled to a remedy?
If a product fails to meet a consumer guarantee, you may be entitled to a replacement, repair, refund or other remedy.
When am I not entitled to a remedy?
You may not be entitled to a remedy if you:
- simply change your mind about the goods
- damage or use goods in an unreasonable or unintended manner
- discover you can buy the goods more cheaply elsewhere (unless the seller guarantees that the goods cannot be purchased more cheaply elsewhere)
- had a defect drawn to your attention before buying (such as goods labelled as seconds with their faults clearly marked)
- did not rely upon, or unreasonably relied upon, the seller’s skill or judgment when choosing a product.
Can I choose the remedy I want?
The law makes an important distinction between minor failures to comply with the consumer guarantees and major failures.
For minor problems with goods
Minor failures to comply with a consumer guarantee can normally be fixed or resolved in a reasonable amount of time. Here the seller can choose to offer you a refund, replacement or repair. This must be provided free of charge and within a reasonable time depending on the circumstances.
For major problems with goods
Major failures to comply with a consumer guarantee cannot be fixed or are too difficult to fix. If there is a major failure with the goods, you can:
- reject the goods and get a refund
- reject the goods and get an identical replacement, or one of similar value if reasonably available, or
- keep the goods and get compensation for the drop in value caused by the problem.
You get to choose the remedy, rather than the supplier or manufacturer choosing.
Can I get compensation?
In some circumstances, when you suffer losses due to the failure of goods to meet a consumer guarantee, you may be able to claim compensation from the seller or manufacturer. As a general rule, you can only claim compensation where the loss can be reasonably attributed to the failure to meet the guarantee.
Need more information?
Here are some useful sources of information about consumer guarantees or your consumer rights more generally:
- the dedicated ACL website www.consumerlaw.gov.au
- the Australian Competition and Consumer Commission website www.accc.gov.au or Infocentre on 1300 302 502
- your local State office of fair trading (which may also be able to help you resolve a dispute with a business).
Choosing a Financial Planner - An Ethical Quandary
by GPCAPT Robert Brown, Chairman, ADF Financial Services Consumer Council
At some stage in your life you may feel the need to consult a financial planner. The challenge will be to choose someone you can trust to act in your interests. That’s not as easy as it sounds because so much of the financial services industry is built around planner remuneration arrangements that are designed to cause planners to sell products, not to offer independent advice. To illustrate that point, I ’m going to pose an ethical quandary. The people involved exist. The facts described are real. The quandary illustrates the difficult ethical choices faced every day by financial planners.
An Australian public servant of some twenty five years’ standing was thinking about retiring. He had to decide whether to take the whole of his superannuation entitlement as a government-guaranteed indexed pension. Alternatively, he could commute a substantial portion of this pension to a lump sum and receive a reduced pension.
His house was unencumbered. He had a few hundred thousand dollars in term deposits in a bank. His lifestyle aspirations were modest and (like many people at his stage of life) he and his spouse were extremely risk averse.
Sensibly, to make sure he was on the right track before making an irrevocable decision to retire, he sought professional advice from a financial planner. He chose a person who has tertiary qualifications in business, is a qualified accountant, possesses the highest qualifications available to financial planners and claims to work on a ‘fee for service’ basis. In addition, the planner has over twenty years of experience and purports to have special expertise in the intricacies of public sector superannuation schemes. Sounds like the ideal choice of adviser.
A couple of successful meetings took place in which the planner made all the right noises and exhibited his experience and truly impressive knowledge of superannuation. Initially, this filled the client with confidence and trust.
In due course, the planner’s written advice was received. Essentially, the advice was to commute the government-guaranteed indexed pension to the maximum amount possible, to borrow a substantial amount of money on security of the client’s unencumbered real estate and to purchase a life insurance policy to cover the debt. It was recommended that the commuted lump sum, the loan, plus a large portion of the client’s cash at bank should be invested in retail managed products administered via an administration platform owned by a financial institution associated with the planner.
This advice resulted in remuneration for the planner of approximately $20,000 per annum, calculated by a combination of percentage-based asset fees on the amount invested in the platform (misleadingly called ‘fee for service’ in industry jargon) plus commissions on the loan and the life insurance policy. In addition, the planner would receive percentage-based bonuses from (or via) the platform based on volumes of funds across his client base.
The alternative advice (no doubt considered by the planner) would be to do none of the above, given the client’s aversion to risk and the security of a government-guaranteed indexed pension. However, if doing nothing had been recommended, the planner stood to earn about $3,000 as a flat fee for service in year one and a lesser flat amount on an ongoing basis should the client’s simple needs warrant it.
I hasten to add that the planner’s advice may well have been reasonable and that he may have genuinely believed his advice to be in the client’s best interests. But here’s the ethical quandary.
When faced with earning $20,000 for recommending the first option and $3,000 for recommending the second option, how can a planner be expected to offer (and be seen to offer) advice that he truly believes to be in the client’s best interests? After all, financial planners are only human. Faced with a mortgage and the need to feed and clothe the family, it’s hardly surprising that the planner was inclined to recommend the first option.
My point is that the financial planner should not have been put in a position in the first place of having to deal with such an impossible and unmanageable conflict of interest. Unfortunately, much of the industry is forced to deal (unsuccessfully) with quandaries like this on a daily basis, principally due to the culturally embedded and corrupting influence of the industry’s vertically integrated product distribution structure.
In the light of the circumstances outlined above, is it any wonder that the public (including this client) does not trust the financial planning industry? Trust cannot be achieved by advertising campaigns and rhetoric about advisers’ and clients’ freedom of choice. It will only be achieved by unwavering adherence to timeless ethical principles, especially principles removing planners from the remuneration conflicts described above. The same is true of any genuine professional discipline.
Fortunately, there is a happy ending to this story. The client found a financial planner who operates without remuneration conflicts and was willing to charge a flat fee (not one based on percentages and dressed up as a ‘fee for service’). As a result, the client took the second option and the planner has a client for life who is delighted to recommend him to his former colleagues.