Missing a Piece?

This year one of our projects is to highlight the massive level of under insurance in Australia. Even though you have covered your property and paid the premium if you don't get the sum insured right you can end up in a dire position.

It's all well and good to throw a figure out and expect that if something happens that's what you will get back from an insurance company. This couldn't be further from the truth. An Insurance policy is a contract between you - the consumer - and the insurer. When was the last time you signed a major contract without getting advice or at least reading over the documents. It happens too often particularly when dealing with direct insurers who work on a 'no advice' model under their licence. No insurer or broker can tell you what to Insure your property for. Our advice is 'replacement value' as this is what the policy conditions states.

Under Insurance is triggered by a policies 'Average' clause. Or sometimes know as Co-Insurance. This means that you must insure for the full insurable value of the property insured. If you under-insure, your claim may be reduced in proportion to the amount of the under - insurance.

A simple example, illustrating the application and effect of the Average/Co-Insurance clause, is as follows:

Full (Replacement) Value = $1,000,000

Policy Sum Insured = $500,000

By this theory your policy dramatically under insured. Thus in essence you have self insured 50% of the full value.

Say you have a claim totalling = $100,000

Due to the average clause you would only be able to access a total settlement of $50,000. (being 50% of the $100,000)

While under insurance may result in lower premiums paid by the policy holder, the loss arising from a claim may far exceed any marginal savings in insurance premiums. Depending on the Policy Wording you may have a buffer zone of for example anything 80% of the value or more will NOT incur a penalty. It is important you seek advice and check the policy wordings 'Average' conditions.

Too often we see Insurance policies with property values that have not changed in many years. This gives us an automatic alarm to Under Insurance. Businesses who suffer a major loss struggle to recover if they are under insured. Insufficient cover can emerge over time. So even if you correctly estimate your cover in the first place and then annually increase the sum insured, it can still lag the actual rise in building costs. ASIC research found that while the CPI increased by 17 percent between March 2000 and March 2005, building costs in fact rose by 33 percent.


Working out the costs of rebuilding is either done on a cost per square metre basis or else on an elemental basis. Generally speaking, the latter is likely to be the more accurate. You also need to factor in amounts for Removal of Debris and extra costs involved. Often policies will have a percentage automatically dedicated to Removal of Debris, but some 'Cheaper' policies include it in your Sum Insured. Meaning your total replacement cost is further reduced having to factor in benefits that you could be getting as 'Additional Benefits.'

We are going to see it again now with the Floods crisis in Central QLD. When assessors go out to properties they will be working with surveyors to sort out the value of the property prior to the claim. If your Sum Insured is not within a reasonable percentage of actual value than consumers may receive reduced payouts.
                                                                                                                
Whilst no one expects you or I to know exactly what our properties value is, it's for the above reasons that we should seek out professional valuers to give us an accurate Sum Insured.


The Insurance Council of Australia (ICA) has calculators to assist in setting your Sum Insured. A number of other direct insurers also have simple calculators for you to use.  The ICA's is on the below link and we recommend you take a look.

http://www.insurancecouncil.com.au/for-consumers/calculators

To also assist LMI group along with Andrew Nock Valuers has a calculator on it's web site;

http://www.lmigroup.com/RiskCoach/calculators/buildingcalculator.aspx?access=anv

Andrew Nock Valuers are one such valuer doing everything from residential dwellings to complex commercial and agricultural property.

As a final link we recommend you check out the Moneysmart web page which has good information at an easy to understand level.The link below takes you into estimating rebuilding costs and related issues.

https://www.moneysmart.gov.au/managing-my-money/insurance/home-and-contents-insurance/estimating-rebuilding-costs

So in summary dont just renew your home or business policy without thinking about the Sum Insured. If you have left it on the same value then chances are you are starting to slide into Under Insurance. For the sake of your business, employees and family, saving a few dollars in premium is no comparison to saving your property.

*** Information courtesy of LMI Group, Insurance Council of Australia, and Moneysmart.com.au All information provided is General in Nature only. Please seek advice on your own personal situation and circumstances prior to setting your Sum Insured.