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Section 2 of 6
A sum insured is the set financial limit a policy pays up to. Underinsurance is when that limit falls short of what it would cost to rebuild, repair or replace what you lost, and Moneysmart says it is very common in Australia.
General information, not financial advice. For the official guide, see Moneysmart on home underinsurance.
The clause
The obvious risk is a total loss, where the cover runs out before the rebuild does. The less obvious risk sits in a clause Moneysmart says most policies have.
Moneysmart, Home underinsurance
Moneysmart says most policies carry a coinsurance clause that comes into play when you are insured for less than 80% to 90% of the value, so check yours. Such a clause caps what the insurer pays at the share of the replacement value you insured, and “The limitation applies to all claims under the policy”, not only a total loss or a full rebuild.
Read plainly
Fall below the threshold in your policy’s clause and the insurer may pay only the insured share of every claim, small repairs included.
Worked example
These figures are Moneysmart’s own illustration of a home it calls 2 Smith St. They are not real costs for any home. The exact effect depends on the policy’s coinsurance clause.
The policy
A tree from a neighbour’s property damages the garage, and repairs cost $15,000. Because the home is 33% underinsured, the insurer pays 67% of the repair, $10,000, and the owner pays $5,000.
Claim one
Contents can be underinsured in the same way, if the cover isn’t enough to replace furniture, appliances, clothes and personal items.
Causes
| Cause | What happens |
|---|---|
| Not reviewing cover | Renovations and new belongings change what you own, and the cover no longer reflects it. |
| Guessing | A number that sounds right may fall well short of the cost to rebuild or replace. |
| Market value, not rebuild cost | Market value includes the land; insurance is about the cost to rebuild, and rebuild costs often rise faster. |
| Renovations | A new kitchen, deck or extension can raise the rebuild cost. |
| Rising building costs | Inflation or high demand for trades can push rebuild costs up while the sum insured stays put. |
| Missing extra costs | Costs beyond the build itself: demolition and clearing the site, asbestos removal, council fees, architects and surveyors, and somewhere to live in the meantime. |
| Underestimating belongings | Furniture, clothes, electronics and personal items add up quickly. |
On asbestos removal itself, the Asbestos and Silica Safety and Eradication Agency says it is “not recommended that you handle or remove asbestos yourself”, and in some places the law goes further: in the Australian Capital Territory any removal needs a licensed removalist, unless it is part of minor routine maintenance or other minor work, and in Queensland a home owner must be trained before taking out more than 10 square metres of non-friable material, and only a removalist holding a Class A licence may remove friable material. The agency adds that asbestos waste can only go to a landfill licensed to accept it, and that even if you follow every safety step, hiring a licensed asbestos removalist who is trained, insured and equipped for the work is much safer and easier. NSW’s planning department says there is “no safe level of exposure to asbestos”, and that in NSW you must not do anything that can release asbestos fibres into the air from material that may contain it, including cutting, drilling, sanding, scraping, scrubbing and water-blasting. For the disposal rules where you live, the national agency keeps a list of the organisations in each state and territory that deal with asbestos.
The Insurance Council adds a caution about places exposed to bushfires, floods and cyclones: after a total loss, local regulations may not allow a rebuild in the same style and materials, and different building standards could significantly affect the cost. It suggests checking with your council whether your property is in a hazard zone.
Checks
Under the General Insurance Code of Practice, when you apply for or renew a home building policy (strata insurance aside), an insurer that has adopted the Code will give you access to a calculator to estimate your sum insured. For a policy that renews automatically, it will remind you at purchase and at each renewal to check whether your sum insured is still appropriate.
Temporary accommodation is usually paid in addition to repair costs, but Moneysmart notes the benefit is typically limited to a percentage of the sum insured or a set period. That is one more reason the number matters.