Underinsurance - why you should not underinsure

A survey by the Insurance Council of Australia (ICA) has found

• That around a quarter of Australian households do not buy house & contents insurance
• Almost 70% of tenants do not protect their property and one in six small businesses has no insurance protection.
• Around 7.5% of home buildings are insured for less than 70% of their replacement value;
• 20% of home buildings are insured for 70% to 90% of replacement value.

Anecdotal evidence from research for the ICA report found up to 35% of contents were markedly underinsured.

The ICA report also said that 70% of uninsured and under-insured small businesses affected by a major event, such as a legal claim against the business, an earthquake, fire or storm, don’t recover.

In the case of under-insurance, most insurers pay only the sum the policyholder has insured. Thus if the home is worth $200,000, but is insured for only  $100,000, then the insurer will only pay $100,000 if the house is totally destroyed.

Some home and contents policies also include “averaging” or “co-insurance” clauses. These clauses can mean even lower claims payments are if a claim occurs and the policyholder has failed to maintain insurance at adequate levels.

Underinsuring your property can have serious ramifications, and all policyholders are strongly encouraged to discuss the impact of underinsurance with their insurance adviser.

Source: Insurance Council of Australia.