What is underinsurance and how can I avoid it?

A woman sits at a table looking at a laptop with a child on her knee.

Underinsurance is when a person’s home or belongings are insured for an amount that is below what it would actually cost to replace them.

Let’s look at an example of this. Say a person’s home is insured for $300,000 and with their home building insurance policy they have a $10,000 excess to pay. Their home is completely destroyed and they have to rebuild, only to discover that the rebuilding costs are $400,000, not $300,000. This means that plus the $10,000 excess, they could be out of pocket $110,000.

Graphic showing bill for rebuilding costs

For many having to pay this amount of money upfront simply wouldn’t be possible, so it’s best to try and avoid the situation altogether. But how do you do that?

How to avoid underinsurance

In 2019 research from MCG Quantity Surveyors found that a large number of Australian homes could be underinsured by as much as 66%! In 2021 the Financial Rights Legal Centre released a report showing that underinsurance was one of the five biggest issues for people making claims post extreme weather events. 

As you can see underinsurance poses a big problem for many in Australia. That said, there are ways you can reduce the risk to yourself. 

Our tips for avoiding underinsurance are:

Tip 1: Know your insurance policy, inside out

Make sure you know exactly what your home insurance policy covers. This includes knowing how your insurance provider defines terms such as ‘fire’ and ‘water damage.’ It may seem like there should be a standard definition for these, but there aren’t.

To make sure you’re not caught short, we recommend reading the product disclosure statement that comes with your policy from cover to cover. If you aren’t sure of anything detailed in the PDS, don’t be shy about contacting the insurance company for further explanation.

Graphic showing magnifying glass, hovering over PDS

Tip 2: Keep your cover up to date

If you’ve been with the same insurance provider for a few years, make sure your policy is still up to date. The value of your home might have gone up since you signed up to the policy. Or you might have built an extension, revamped the exterior or even simply acquired more expensive contents. For any of these scenarios the insurance you have would most likely need to be increased. 

You might review your cover and decide to pay for more optional extras too. For instance, maybe your area wasn’t formerly classified as a flood zone, but now it is. In this case,you may want to add flood cover to your policy. Or you may even decide that the policy you have at the moment isn’t cutting the mustard, in which case you could review what other home and contents insurance plans are available in Australia.

Tip 3: Don’t undervalue your home

It may be easier said than done, but making sure your home isn’t undervalued is crucial. There are a number of online calculators you can use to get an estimate of how much your home is worth. One of these is CoreLogic’s Rebuild Cost Calculator

Although these calculators will only be able to give an estimate, so it might not be ideal to rely on them completely. Home valuation experts could be another option to get an estimate of how much your home is worth. A quick internet search will bring up home value assessment experts in your state or territory.

Tip 4: Take out underinsurance protection

As underinsurance is an ongoing issue in Australia, a number of insurance companies now offer underinsurance protection. This is usually available as an optional extra with home building insurance. 

Often insurance providers will refer to this as a sum insured safeguard or safety net. This safeguard or safety net is usually a specific percentage extra that the insurance provider is willing to pay, if it is discovered that a home has been underinsured.

Let’s go back to that example we gave at the beginning. To recap, the person’s home was insured for $300,000, but the rebuild costs turned out to be $400,000. This is not good news.  However, in a scenario where the person had a 25% sum insured safeguard with their home insurance policy, their insurance provider would then pay a bit extra towards rebuilding costs. In this example, the sum insured safeguard could see the insurance provider pay around an extra $75,000. 

That means that overall, around $375,000 could be paid towards the person’s rebuilding costs. They would still be out of pocket, but it would be a lot less than if they had not had that safeguard to fall back on. All in all, you might not think that you need that extra safety net, but if it turns out that your home has been underinsured, it could be very handy.

Some home insurance providers that offer underinsurance are:

  • 1st for Women
  • AAMI
  • Australia Post
  • Bankwest
  • Budget Direct
  • Coles
  • CommInsure
  • GIO
  • St George
  • Suncorp
  • Virgin Money
  • Westpac

Want to read more about how home insurance works? Check out Mozo’s home insurance guides for more information on what to look for in a policy. Or, if you’re thinking about switching, take a look at the home insurance deals on offer below.

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