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Insure your home for what it would cost to rebuild it today, not what it would sell for, and include demolition, professional fees and the cost of meeting current building standards. Insure your contents for what it would cost to replace everything at today's prices. Both figures should be checked every year.
Getting these numbers wrong is common. Moneysmart describes underinsurance as very common in Australia and notes that most people do not know they are underinsured. ASIC's 2005 report on home insurance found that, depending on the survey, between 27 and 81 per cent of consumers were underinsured by 10 per cent or more. The consequences can reach beyond a total loss: under an averaging clause, even a small repair claim can be paid only in part.
By Better Rate Mate Editorial Team ยท Last reviewed
Market value includes the land, which a fire or flood does not destroy, and it moves with the property market rather than with building costs. Rebuild cost is what it would take to clear the site and construct the same home again, at current prices, to current standards. In expensive suburbs the rebuild cost can be far below market value; in regional areas, or for older homes with character features, it can be higher. Moneysmart notes that rebuild costs often rise faster than people expect.
A building calculator does most of the work, provided you give it accurate details.
Go room by room and list what you would need to replace, at today's prices for new items. Include the garage, shed and garden, clothes and shoes for everyone, linen, kitchenware, tools, sports equipment and anything stored off-site if the policy covers it. Filming each room gives you a record for claims and a prompt for things you forgot. Then check the policy's category limits: if your jewellery, art or electronics exceed them, list those items separately.
If your sum insured is too low, a total loss claim is capped at the sum insured, so you carry the shortfall. The less obvious risk is an averaging (coinsurance) clause. Moneysmart explains that most policies with a coinsurance clause apply it when you are insured for less than about 80 to 90 per cent of the replacement value, and that it can reduce every claim, not just a total loss.
Moneysmart's worked example: a home that would cost $600,000 to rebuild is insured for $400,000, which is 33 per cent underinsured. A $15,000 garage repair is paid at 67 per cent, about $10,000, leaving the owner $5,000 out of pocket. If the house is destroyed, the insurer applies the same proportion to the $400,000 sum insured and pays about $268,000 towards a $600,000 rebuild.
| Claim | Cost | Insurer pays (67%) | Owner pays |
|---|---|---|---|
| Garage repair after a tree falls | $15,000 | $10,000 | $5,000 |
| Total loss and rebuild | $600,000 | $268,000 | $332,000 |
Most policies pay up to the sum insured you choose. Many add a buffer, a percentage above the sum insured that is available if a total loss costs more than expected, and a few offer total replacement cover that pays the actual rebuild cost subject to conditions. A buffer is valuable but it is not a reason to round down: it is there for the costs no calculator predicts, such as post-disaster price surges. Moneysmart suggests checking whether a policy includes cover above your sum insured when you compare.
Moneysmart lists the common causes. Most are simply time passing.
Use a detailed building calculator with your floor area, construction materials, slope and site access, then add demolition, debris removal, professional and council fees and the cost of meeting current building standards. For unusual homes, get an estimate from a quantity surveyor.
Rebuild cost. Market value includes the land, which does not need replacing, and it moves with the property market rather than construction costs.
A total loss is capped at your sum insured, leaving you to fund the gap. If your policy has an averaging clause and you are insured for less than the threshold it sets, partial claims can be reduced in proportion to the underinsurance too.
Enough to replace everything you own with new items at today's prices. A room-by-room list, or the Insurance Council of Australia's contents calculator, is the most reliable way to get there.
At every renewal, and after any renovation, major purchase or change in building rules for your area.
