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Underinsurance...lessons to be learnt

Another problem which will emerge from the current bushfire crisis.

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Hi @Fred123.

This is an invaluable point and often comes up after a major disaster, whether flood, storms or bushfires.

We use a broker who provides advice, at some small cost, in relation to rebuild costs for our house. Something which often arises is the rebuild costs are far higher than the market value of the house and land combined. Rebuild costs can be a lot more due to a number of factors such as location, property landform, cleanup costs, contractor costs (which can increase substantially through demand after a widespread event) etc.

There are some online rebuild calculators (such as those using Cordell is one example) which can be used to estimate rebuild costs. One shouldn’t rely on what a property purchase price as a guide as it will usually be the wrong nunber to use.

I am sure that there are other forum members which have made insurance claims for property, car, personal items etc only to find out they they were uninsured for the replacement costs. If anyone has such stories or experience, you are more than welcome to contribute below.

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2011 Floods we had Contents insurance thankfully but after the floods and calculating our losses we were short by at least $70,000 on replacing the items we lost. The insurance we did get replaced the really important things eg washing machine, Fridge, Freezer, beds, tables, chairs but we had to skrimp and save to get some items replaced. Some items are never replaceable as they have special memories or are unique in make/manufacture eg Artworks.

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Our current home & contents insurance policy renewal lists a value for our home excluding the contents of around 33% more than we paid for the property 5 years ago and values in this area have not changed much in this time.

One of the biggest problems is the unbelievable thieving that occurs after a disaster.

My wife’s sister’s husband related how the former South Johnstone Bowls Club received a quote to replace their corrugated iron clubhouse roof shortly before Cyclone Larry for around $18,000.

When they contacted the tradie to give the go ahead after Cyclone Larry, the price mysteriously skyrocketed to some $44,000 for the same job.

And of course there are all the crooks, scammers, charlatans and other blow-ins who arrive to do the cheapest and shoddiest job possible at the highest possible price, if they actually do any work at all, and then cut and run.

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This is a fraught comparison.

  1. What you paid for the property is land value + house value.

For a freestanding property, the land value will often be the lion’s share of the property value (amount paid) but the land is not insured.

(Admittedly the amount paid can sometimes also reflect unusual factors like unique features and/or FOMO.)

  1. The house value that you paid is the depreciated value (notionally at least) i.e. the value of a potentially old, tired home - whereas the insured value needs to be the value of an identical, suddenly magically brand new home.

Unless you bought the property new and the property is, say, an apartment in a large multi-storey development, it is not meaningful to compare the amount paid and the insured value.

You should also take into account any significant improvements that you have made to the house (including any fixtures) subsequent to purchase.

Sorry to hear that. I understand how that could occur. In fact, it is hard to see how anyone could come up with an accurate figure. I know we have some six figure number for contents on our home and contents insurance but I have no idea whether it would really cover all the contents if the house burned to the ground. (As you say, I am only talking about the dollar value of the item, not any non-monetary considerations for items of special significance to the owner.)

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Often overlooked, particularly if asbestos is involved.

There are likely to be various survey fees, builders insurance, and of course the DA fee.

It all adds up.

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I am well aware of that but the sum insured is based on what the insurance company claims is their estimate of its replacement cost based on location, type of dwelling, etc.

Taking away the current market value for our land would mean that the replacement cost for the building would be around double what we paid for it plus what we have spent on improvements, which always seems high until one considers what occurs in the aftermath of a natural disaster.

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That’s fine although there is a question as to how you established the land value. You can’t really rely on the Valuer General (or whatever it might be called in your state or territory).

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That’s the easy part. We just look at what other blocks with similar sizes and views have sold and are selling for in our subdivision,

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That’s a solid approach. It wouldn’t ordinarily be available to the general home buyer e.g. buying in an established area where there are no land sales.

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As I’ve written elsewhere, the safest way to value the building is to get in a registered valuer (NOT a real estate agent) to give you a valuation. These give a definite value and are accepted by insurers. When we had this done, it cost under $500 - much less than the cost of under/over insuring.

Valuing the contents is another matter. With jewellery valuations being so expensive it is something that you need to do sparingly, and always ask for a valuation certificate when buyng any jewellery. Contents insurance is a bit easier, but time consuming to do properly. It is a matter of cataloguing all your possessions and putting a reasonable replacement value on them. Remember to open all drawers and cupboard doors too. Look at the carpets, curtains, etc. Then add it all up (when you are seated) to see how much it would cost to replace it all.

It can be very surprising how much value we have accumulated over time.

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We did this at our previous residence and again at our present home.

That is certainly the case for a single dwelling loss such as in the event of a house fire but it becomes much more problematic in the case of the loss of many dwellings such as in the case of bushfires, floods and cyclones when demand overtakes supply and outright theiving is the denominating factor.

Of course it is also extremely important to insure with a reputable insurer so as not to be left in the lurch.

My wife’s sister and her husband live outside Innisfail, and after Cyclone Larry, Comminsure told them to take water damaged electrical items into Innisfail to get a quote to try to repair them whilst Suncorp were simply approving their customers to get replacements.

And the media reported how the owner of a block of flats in Ingham which contained asbestos became so enraged that he went into the bank after waiting some 9 months after Cyclone Yasi for Comminsure to actually do something and smashed a piece of asnestos cement sheeting on the floor.

He was charged and convicted of a serious offence but the grubby insurance company, who were perfectly happy for his tenants to live with the risks of asbestos exposure, kept on laughing.

Which bank? Yep, those grubs.

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I found it very difficult to determine the value of the property when it came time to purchase insurance. The insurer has an online calculator but one would think they have a vested interest in exaggerating the building value in order to bump up the premium.

For contents, I maintain an assets register so it’s easy to gauge the amount of cover needed. For the house, I used the market value of the house and land (as at the purchase date 6 years ago) as my baseline, then added the cost of capital improvements that I’ve applied.

I have no idea whether that cover is sufficient but the annual premium is jolly high!

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The insurer calculators are often estimating platfforms developed by independent organisations such as Cordells.

These platforms give estimates only and this is recognised by many insurers…as many will provide coverage greater (say 25%) more than the estimate to cover any unforseen costs…or slight underestimates resulting from data entered by the consumer.

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Thank you for the information.

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For any property which has a high value, unusual or sloping site, old or may be architecturally different.

The cost of a professional replacement valuation is worth consideration. Independent valuers, there are several national chains, will provide a quote to provide the estimate. This can be broken down to show the allowances for demolition, building design, approvals, project supervision, etc.

The estimate should also reliably identify any additional costs that may arise due to more onerous building regulations than the original building/s required. These can include details such as wind and cyclone ratings, fire protection ratings, updated sewage/waste and storm water codes/regulation, etc.

Note:
Some councils have other unexpected requirements such as updated property access and setback distances. While it sounds silly that city hall would not let you rebuild on exactly the original footprint, not all councils are that fair minded. Queensland amalgamated many smaller councils. Some newer local government areas that were once rural specific are now urban dominated. What the old local ‘Shire Councils’ accepted is now superseded by the policies of the big brother urban council in the amalgamation.

I’ve neighbours who have become trapped in that mire for some very every day building approvals. No exemptions!

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Thanks Mark!

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And some of these types of dwellings may also require more specialist cover than available through a retail home and contents insurer. As we have found out ourselves with a recent purchase of a 1838 built dwelling, one needs to go directly to underwriters for coverage. Underwriters, their quotes and cover can be accessed through insurance brokers…and the Insurance Council of Australia has a website to help find brokers in such cases.

http://www.needabroker.com.au/

Choice has also covered Home Insurance Calculators in the recent past and provides some good advice…

What is intersting from the Choice article is that the independent Cordell calculator is towards the high end of the range of rebuild etimates when compared with some of the insurance company calculators. Does Cordell over estimate rebuilt costs or do some insurance companies underestimate rebuild costs? Maybe the variations are covered by the extra cover precentage above agreed rebuild estimates offered by some companies.

It is also worth noting that some of the insurance company calculators are the same values as Cordell, indicating that the Cordell calculator may (is?) be the platform used by these insurance companies for estimating rebuild costs.

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Something else to consider is that you may not be able to replace like with like. If the original home had any age to it, it is likely that building codes have changed and this will add to the rebuild costs not only in terms of design but also of permitted building materials. Then you also need to consider that after a disaster, prices are likely to rise as demand for services outstrips providers of those services.

As for content insurance, people just don’t spend enough time considering the costs of replacing every pair of socks, teaspoon, pot, pen, pillowcase, dog bowl, cleaning product etc. It is easy to consider the big ticket items like the fridge or washing machine, lounge or the beds, but they are not really the costly items. Open your wardrobe or even the cupboard under the sink or bathroom cabinet and add up what it would cost to replace every single item you find there!

Home and content insurance is an expensive item that deserves far more attention than most are prepared to afford it. It is not a purchase to be rushed, or even simply rolled over from yeear to year. Things change over time and you need to ensure any insurance is still ‘fit for purpose’.

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We check with the local builder who built our house each year. Well worth it.

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