Are You Underinsured?

November 21, 2022Insurance

90% of Australians underinsured according to the Australian Institute of Quantity Surveyors (AIQS) & Australian Securities and Investment Commissions (ASIC).

Insurance is designed to restore your home or business to the condition it was in before an insured loss without financial penalty. Regardless of what amount your asset was originally bought for and how much you believe it could be worth, the sum insured must either be equivalent to the current replacement value or the current market value, depending on the type of policy you have.

Underinsurance occurs when the insured value of your home or business assets is less than the rebuild or replacement costs. As well as not receiving enough money to cover the cost of your loss, if you significantly underinsure your home, contents, or business assets, the insurer may have the right to reduce the claim payout by the same percentage/amount as the underinsurance.

As a home or business owner, it is your responsibility to value your assets, whether that is by using an online calculator or a certified property valuer. Although as your insurance advisor we cannot give advice around the sums insured for a building, we can advise clients about the risks of underinsurance, question if they have done a recent review of the rebuild/ replacement value and if the recent rises of the cost of building materials have been considered.

It is important to consider that the dollar is being devalued by inflation, which is also possibly limiting the coverage your insurance offers. Inflation rates are at the highest they have been in a generation. Pandemic lockdowns, supply chain delays, disruptions in the energy supply, and a lack of workers have increased the value of various commodities and extended the completion dates for services ranging from infrastructure development to legal proceedings. When these price surges are taken into consideration, replacement values for tangible assets, including fleet cars, plant and equipment, items in transit, and property, may be significantly higher than their insured estimates.

The potential impacts of being underinsured can be financially devastating. If your home experiences a total loss and you are underinsured, you will be responsible for paying the shortfall to rebuild the property.

Below is an example of underinsurance and the potential shortfall in the event of a loss:

No alt text provided for this image

Some important tips to avoid underinsurance are to assess your policy and sums insured frequently, value your assets correctly and seek professional advice from your broker.

As your insurance advisor, we can assist with:

  • Understanding your specific policy’s underinsurance, Co-insurance or average clause.
  • Frequently review and discuss your asset’s sum insured to ensure it reflects the true and accurate replacement costs of your assets.
  • Provide access to external property valuers and estimators
  • Provide working examples of the financial effects that underinsurance claim short falls may have on your assets.
Article by Scarlett Financial