The True Cost Of Underinsuring Your Home Building And Contents Best Guide 2023
The True Cost Of Underinsuring Your Home Building And Contents Best Guide 2023 – If you’ve ever been tempted to decrease the sum insured for your home and contents in order to obtain a lower premium, think again. You may end up paying a far higher price than you imagined.
Whenever we take out an insurance policy, we are entering into a contract with the insurer. Whether household, motor vehicle, personal accident or any other type of policy, it is a legally binding contract between the insurer and the insured.
For householders, insurance of home building and contents is vital, not merely for peace of mind but to maintain the lifestyle they are accustomed to if the unthinkable should happen.
The Importance of Accurate Coverage
There are several aspects to consider when purchasing household insurance.
- Duty of Disclosure: The insured has a duty to disclose to the insurer anything that they know or could reasonably be expected to know is relevant to the insurer’s decision to accept the risk and, if so, on what terms. For obvious reasons, this is called the Duty of Disclosure.
- Utmost Good Faith: Each party to the contract (i.e., insured and insurer) has an obligation to each other in accordance with the clause of Utmost Good Faith. This clause overrides all other clauses in the policy and is the measure by which the majority of insurance disputes are settled.
- The Significance of Sum Insured: The sum insured is a major consideration when taking out an insurance policy. It not only affects the cost of the premium but the insurer’s liability if a claim is made. For home building and contents insurance, the sum insured is, arguably, the most crucial aspect and the importance of “getting it right” cannot be overstated.
Underinsurance Dangers
According to The Insurance Council of Australia, approximately 43 per cent of home building and/or contents policyholders are significantly underinsured.
Determining the Sum Insured
For many people, determining exactly how much to insure their home building and contents for is a daunting task. It needn’t be, however, with a few guidelines to follow.
Most insurance companies offer replacement cover for household policies – or “new for old” so it is important to insure the building and contents for their full replacement value, not their value after depreciation.
- Home building insurance: The sum insured is based on the total cost involved in rebuilding the property to its original or a comparative state. Consultation with a professional builder or property valuer is recommended.
- Home Contents Insurance: The most effective way of determining the sum insured for contents insurance is to conduct a room-by-room inventory. Most insurers provide literature, online information, and calculators to assist with determining sums insured.
The Risk of Underinsurance
As previously stated, the sum insured determines the insurer’s level of liability in the event of a claim. If the property is underinsured, the result can turn an already traumatic event into something more devastating.
The Average Clause
Some insurance policies contain an “average clause” or “co-insurance clause.” This clause means that in the event of a claim, if a property is found to be significantly underinsured, the liability of the insurer will decrease commensurate with the level of underinsurance.
Illustrative Examples
Consider two scenarios: one without the average clause and one with it.
Conclusion:
These examples underscore the critical importance of accurate valuation in home building and contents insurance. Cutting corners by reducing the sum insured can lead to catastrophic consequences in the event of a claim. It’s far wiser to pay the appropriate premium and ensure that you have adequate coverage.
FAQs:
Q1: What is the Duty of Disclosure? A: The Duty of Disclosure requires the insured to reveal all relevant information to the insurer that could impact the acceptance of the risk.
Q2: How does Utmost Good Faith affect insurance contracts? A: Utmost Good Faith is a fundamental principle requiring all parties to act scrupulously and transparently in their dealings, forming the basis for insurance contracts.
Q3: How can I determine the right sum insured for my property? A: For home building, consult a professional builder or property valuer. For contents, create a room-by-room inventory of items and their replacement costs.
Q4: What is the Average Clause in insurance? A: The Average Clause reduces the insurer’s liability proportionally if the property is underinsured at the time of a claim.
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