Weatherproofing your policy

23 per cent of Australians do not have home and contents insurance at all, with many more underinsured.

How weatherproof is your home and contents insurance policy?

The Insurance Council of Australia (ICA) says 19 of the 20 largest property losses in Australia over the past 40 years have been weather related. Many of these “wild weather” events have left many policy holders out of pocket due to underinsurance as well as not having insurance.

But there are ways to ensure your policy is as watertight as possible.

The F-Word

If your house is hit by an earthquake, most insurers will cover your damage bill. Similarly, you can expect a payout if rainwater enters your home through the roof during a storm or water damage is caused by an urban drainage overflow.

Likewise for thunder, lightning, even a civil riot. But when it comes to flooding it can be a different story, as many policies do not cover flooding.

The ICA says more accurate national flood-mapping data is required before insurers can accurately and fairly price the risk associated with flood insurance. In the meantime, an estimated 170,000 Australian homes in flood-prone areas remain vulnerable.

Of particular concern to the ICA is that many residents in these areas are unaware that they live in a flood-prone area and won’t be covered for flood damage. Similarly, new home buyers are not always informed by their local council that they face higher flood risks.

Water damage can also be a grey area due to different definitions applied by insurance companies.

More positively, with competition rife in the general insurance industry, even those in flood-prone areas may be able to improve their wet-weather coverage by shopping around.

Underinsurance also a big issue

While 23 per cent of Australian households or 1.8 million homes are estimated by the ICA to have no home and contents insurance, an equally worrying issue is the level of underinsurance among existing policy holders, particularly when it comes to building replacement.

In a survey of 16 insurers last year, the Australian Securities and Investments Commission (ASIC) found the average sum insured for home replacement was less than $226,000.

You don’t have to be a building expert to realise that many insured home owners would be left significantly out of pocket should their home need replacing.

Moreover, many policy holders forget to upgrade their cover after a renovation and most fail to take into account such rebuilding expenses as engineering fees and demolition costs.

ASIC also noted that even if a consumer correctly estimated what it would cost to rebuild their home in a one-off total loss, it was almost impossible to know what it would cost to rebuild a home that is destroyed in a mass disaster.

In the case of the 2003 Canberra bushfires, which destroyed almost 500 homes, building prices were estimated to have surged by as much as 30 per cent immediately after the disaster, resulting in an average level of underinsurance of between 27 and 40 per cent.

Improving your protection

1. Total replacement. One of the easiest ways to avoid the problem of underinsurance is to take out a total replacement policy. This policy means the insurer pays the full rebuilding costs rather than being limited to the specific sum insured, and so takes the guesswork out of building insurance for the consumer.

2. Extended replacement. Alternatively, a few insurers offer “extended replacement” policies, which typically pay 25 or 30 per cent above the original sum insured.

3. Review your building cover. A third option is to simply review your level of building cover to ensure it is adequate. Calculators are available on most insurance company websites.