Why You Need to Avoid the Underinsurance TrapJanuary 23, 2020 - 5 minutes read
“Underinsurance” refers to not having enough insurance to rebuild or replace your assets after losses or damage following a disaster. While it’s true that some insurance is always better than none, being underinsured indicates you are not providing adequate financial protection for your assets.
According to the Insurance Council, many Australians don’t have enough insurance to cover the cost of asset replacement. This can happen for several reasons:
- the desire for cheaper premiums;
- inaccurate assessments of property value;
- failure to update the value of assets over time; or
- being in a hurry to secure a policy.
Underinsurance can have very negative consequences. It can for instance make it difficult to rebuild to the same standard after a disaster, leaving you way out of pocket. And if your contents are inadequately insured, you may not be able to replace them with new items, potentially leaving you worse off than before.
If you intentionally choose to underinsure to get lower cost premiums, it could turn into short-term gain for long-term pain. But even if it’s accidental, it could lead to losses you could probably well do without.
Ensuring you have the right types of cover
Another factor to consider is having the right types of insurance.
For example, many businesses fail to secure business interruption cover, preferring to take their chances – or perhaps because they are unaware this insurance even exists. This could mean not being able to meet ongoing costs such as rent, wages and bills while the business is out of action following a disaster. It could also in turn lead to complete closure of the business altogether.
When costs are tight, it could be easy to neglect to get the right level or types of insurance cover in order to save money. However, the difference between underinsurance and accurate cover may only be a matter of a few dollars each month – depending on the situation of course.
Securing the right level of cover
Some property owners use online calculators to work out the value of replacement or rebuilding. Online calculators usually use one of two methods. These are costs per square metre which is quite general and basic, and elemental costing – a more detailed approach which assesses several different elements of the building.
While the Insurance Council recommends these types of tools, research by MCG Quantity Surveyors has found the use of online calculators leads to underinsurance of buildings by up to 66 percent.
Either way, the most important thing here is to accurately evaluate the cost of rebuilding or replacing your assets. This includes assessing how much it would cost to rebuild to the same standard, including all external structures. You also need to consider what it would cost to replace all contents with similar but new items.
However it’s important not to go by market or resale values as these could differ markedly from replacement costs.
At CCI we provide free-of-charge professional valuations for your church’s building. This allows us to accurately set the sums insured. This value is also indexed annually to allow for inflation.
It’s up to you however to determine the value of your contents. This needs to be based on replacement cost of the items rather than depreciated value. We have created an inventory form to help you keep track of the replacement value of your contents – this can be found under ‘Forms‘ in the Members section (scroll down to find it). Also see our previous post on insuring your community’s assets for more information on accurately insuring contents.
Need more assistance or information?
If you would like more information or to discuss your insurance policy, call our insurance team on 03 9488 8800 or send us an email.
Written by Tess