Home and contents underinsurance

Underinsurance is when your sum insured amount is lower than the actual replacement cost for what you’re insuring. For example, if you’ve insured your home building for $400,000, and the cost of rebuilding it is actually $500,000, you’re underinsured by $100,000.

If your home is destroyed and your level of insurance cover is inadequate and doesn’t cover the total rebuilding costs or total replacement value of your home, you’ll have to pay the difference out of pocket. Also, if you suffer a partial loss and you are underinsured, your insurer might reduce the payout, leaving you out of pocket.

Being underinsured doesn’t have any immediate consequences. If nothing causes damage to your house or belongings, you may not realise you’re uninsured. However, if you need to make a home insurance claim, being underinsured can be a big problem.

This is because, in the case of an insured event like say, a bushfire or some other natural disaster, your total loss could be significant, and your current home insurance policy may not pay you enough to cover your total rebuilding costs.

Add in the cost of your belongings, especially valuables like jewellery or a laptop, and you could end up even more out of pocket if your contents insurance isn’t adequate.

Underinsurance can happen in a few different ways, including:

• You didn’t have an appropriate level or type of home insurance in the first place.
• The value of your home increasing due to property market fluctuations
• Renovations or remodeling work increasing the value of your home beyond what you’d originally insured it for
• The cost of rebuilding your property being inflated by an increase in the cost of labour or building materials

Underinsurance can happen immediately or over time without your knowledge so it’s important to understand the risk of underinsurance and how to stop it happening to you.

One of the easiest ways to avoid being underinsured is to know the value of your home and belongings, and insure them accordingly. To get a good idea of how much your property is worth, you could hire a quantity surveyor to conduct a professional valuation of your home.

When it comes to your belongings, don’t confuse their replacement value with what you bought them for. For items that are particularly expensive, take a look online and see how much it would cost to replace that exact item. You may be surprised by the difference between what you paid originally versus what they’re worth now.

If you don’t currently hold home insurance but are looking to take out a policy and don’t want to end up underinsured, make sure you read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) of any policy you’re considering. This will help you figure out what you’d be covered for under that policy, what your cover would be, and if the policy might be appropriate for you.

Some insurance companies offer a form of protection against underinsurance known as a ‘sum insured safety net’ or ‘safety net home protection’. Paying for this optional extra generally means you’ll be covered for an additional percentage (commonly 25%) of your home and/or contents’ value if you make a claim.

While your premiums will be higher if you opt to include a sum insured safety net on your policy, you’ll have peace of mind knowing you’re protected against underinsurance in the event of accidental damage to your home or belongings.