How To Avoid The Pitfalls Of Underinsurance

Underinsurance is rife among Aussie property owners, landlords and tenants.

According to the Insurance Council of Australia (ICA), eight in 10 homeowners and renters are insured for less than their home and contents would cost to replace (or have no insurance at all).
This article was written by EBM RentCover and was originally published here.

Having cover in place is invaluable when things go wrong, but policyholders need to understand their insurer may only fully respond to a loss when the right type and amount of cover has been selected.

A head’s up for renters

Did you know? the ICA estimates that two-thirds of all renters don’t have any contents insurance.

Many renters think their landlord’s insurance will cover their possessions too, but it is a misunderstanding that could prove costly. Landlord cover only applies if the policyholder is found to be liable for the tenant’s losses. To protect their possessions, tenants need their own contents insurance (like TenantCover).

Tips for landlords

At EBM RentCover, we work to educate clients so they understand the value of landlord insurance – and can make the best decisions about the cover they purchase. We never want you to risk being underinsured, so here are four tips for landlords:

Assess your risks

Identify the things that could possibly go wrong and the likelihood of these occurring and their potential impact. Then, compile a list of items you would not be able to afford to cover yourself, should something go wrong. For example, ask yourself if you could afford to pay your mortgage if the tenant stopped paying their rent?

Determine the type of cover needed  

It is important to select a policy that is suitable for the type of property and the way it is rented. For example, home and contents policies typically offer protection for insured events such as fire and storm. However, they often do not cover loss of rent and tenant damage.

Example: A tenant suffers a job loss and stops paying rent for six weeks before unexpectedly moving out of the property. Upon inspection, it was discovered there was malicious damage to the walls, including two large holes in the hallway.

Landlord insurance policy Home and contents policy
Rent default up to six weeks Covered Not covered
Loss of rent during repairs Covered Not covered
Malicious damage Covered Not covered

In addition, if you own an apartment, villa or unit (a strata-titled property), the body corporate may insure the building and common areas in the property – including common hallways, garden and driveway. Because these are covered through the body corporate, many landlords assume they do not need to purchase insurance themselves – this is not the case. The body corporate does not offer protection for unit contents including non-fixed appliances, furniture and electronics, and does not offer protection for loss of rent or legal liability.

Ensure the sum insured is adequate

Did you know? the ICA estimates that more than 40 per cent of households fail to correctly assess the value of their home and contents?

Many owners inadvertently find themselves underinsured simply by underestimating how much it would really cost to replace their investment property and its contents. The ICA suggests the property is underinsured if an insurance policy covers 90 per cent or less of the rebuilding costs.

Remember building costs and standards change and you need to base your sum insured on the amount it would cost to rebuild the property (not on the original purchase price). Engage a quantity surveyor, builder or sworn independent valuer to get an accurate estimate. And don’t forget to factor in other expenses such as demolition, debris removal, and architectural, engineering and council costs.

When it comes to the sum insured for contents, make an inventory of the property within the rental that you own and ensure the replacement costs are up-to-date.

Review and update your policy

Did you know? the ICA estimates one-third of owners risk underinsurance by not updating their contents policies to cover new possessions?

Regularly review the sum insured to make sure it remains adequate (and not just at renewal time, but if your circumstances change). If you renovate the property or upgrade any contents (including appliances), make sure you still have enough insurance cover to account for these improvements.

Sadly, incidents of underinsurance are most commonly picked up on large loss claims and there can be lasting negative ramifications for the landlord (and, as a consequence, for their PM and tenants), ranging from putting them in significant debt, to repairs never going ahead and the property just sitting there in its damaged state.

At EBM RentCover we care about your property so if you have any question about underinsurance please contact us.

Now you have a better understanding about the pitfalls of underinsurance, check out the EBM RentCover range of products to find suitable protection for your property.

*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are there, contact 1800 961 017 if you have any questions.