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What is underinsurance and how can you avoid it?

Alex Ritchie avatar
Alex Ritchie
- 5 min read
What is underinsurance and how can you avoid it?

If you are an Australian homeowner, you want to know that your home insurance policy has adequate coverage in the event the worst does happen. However, many Australians may actually be at risk of being underinsured.

In fact, MCG Quantity Surveyors claim that 83% of Australians are underinsured on their properties. Further, the Insurance Council of Australia estimates that 23% of Australian households do not have building or contents insurance. This equates to nearly 2 million residential households that are not protected. 

Underinsurance refers to when the sum insured on your home and contents insurance policy does not cover the full cost of replacing, fixing or rebuilding your home and contents. There is a gap between how much you may be paid by the insurer for an adverse event, and how much you actually need. 

The general rule of thumb is that your home and/or contents is underinsured if your policy covers 90% or less than the recovery costs. So, how does underinsurance occur and how can homeowners avoid it? 

How does underinsurance occur?

Underinsurance is a problem that can impact even the most diligent of homeowners, as the value of your property, the materials required to rebuild or repair your home and the cost of replacing your contents can increase over time - especially in a higher-inflation environment

A gap in insurance cover means you’d potentially have to pay a significant amount out-of-pocket to rebuild your home and assets in case of an emergency. This could potentially lead to a financial burden that may have been easily avoided by purchasing the right cover in the first place.

Some of the most common ways that homeowners find themselves underinsured includes:

  • Guessing the cost of repairing, rebuilding or replacing, as opposed to being thorough and using building insurance calculators or contents insurance calculators.
  • Increasing costs, such as the cost of materials and labour since you first took out your policy.
  • Accruing more belongings over time, such as new electronics, appliances and furniture, and not updating your policy to include these.
  • Underestimating how much you ownEver moved house and been shocked at how much stuff you actually have? This is a common trap that can sting homeowners if they have not requested a coverage amount that accounts for alltheir belongings. 

How can you avoid underinsurance?

Underinsurance is common in Australia, and assuming you do not live in an uninsurable area, it is often the result of a lack of awareness across any of the above factors. 

To avoid underinsurance, consider revisiting your home and contents policy every couple of years to check whether it reflects the present value of your home and belongings. If not, you may need to apply for a larger cover to plug the gap in coverage.

Don’t forget that you can compare home and contents policies online to find an option that better covers your assets and suits your budget. 

While comparing, keep in mind that different policies have different features, and the cheapest policy might not provide you with the cover you need. Take time to read the fine print, compare all features, and read the Product Disclosure Statement (PDS) before making a decision.

Natural disasters, high premiums and a lack of coverage

In some cases, high policy premiums can also discourage some people from taking adequate cover.

Generally, a home and contents insurance policy can cost you a few hundred to a thousand dollars, depending on your home, belongings and where you live. Unfortunately, with the frequency of natural disasters like bushfires and floods continuing to rise, insurance costs have the potential to be driven up even further.

A 2019 Australian Competition and Consumer Commission report found that the average premium figures for home and contents insurance in Townsville were $3,088 annually, with 10% of residents paying premiums of up to $4,682. This is a town that frequently experiences cyclones and other adverse events. 

Nowadays, there is a growing number of Australian homeowners that are experiencing insurers refusing to cover their homes, particularly after experiencing natural disasters. Or if an insurance company will offer coverage, the premium can be as astronomically high as $30,000.

Unfortunately this can result in homeowners being underinsured, or not insured at all. Outside of going back in time and purchasing a home in a location that doesn’t experience natural disasters, there may be little that homeowners can do. Particularly as climate change is expected to increase the range and impact of these events. 

It’s worthwhile taking stock of any financial assistance offered by your state government. There may be government assistance and grants available in the event your area is declared a disaster zone - particularly for those that are underinsured or do not have insurance:

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Product database updated 16 Jun, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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Product data updated on 16 Jun 2024