A number of our clients have suffered fire damage to their houses and when they have lodged an insurance claim, they have received a lesser amount than the sum insured. It is crucial people ensure they have adequate insurance coverage.
The three major reasons why people did not get full coverage under their insurance policies were as follows:
The difference between a replacement (or reinstatement) policy and an indemnity policy
A number of clients who had older type houses destroyed by fire had received a lesser amount than the insured value when a claim was lodged, because the policy was an indemnity policy.
Under an indemnity policy the insurance company depreciates the value of the replacement building or item depending upon its age, commonly one percent per year. For example, if your house was insured for $100,000 under an indemnity policy and the cost of replacing the house is $100,000 then the indemnity policy provides that the insurance company can depreciate the value of the house by multiplying the age of the house by one per cent.
If the house was 64 years old, then the amount payable under the policy would be the replacement value of $100,000, less depreciation of 64 years multiplied by one per cent, or a final amount of $36,000 after depreciation.
Under insurance (co-insurance clause)
People insuring the house should regularly check the replacement costs of building a home. Calculate the cost per square metre of the house. For example, if the house is 140 square metres, then the current replacement cost could be $1,500 per square metre. Consider also the costs fixtures such as carpets, light fittings, hot water services, fences and driveways should be taken into consideration.
Another major reason why people have not received the full cover of their destroyed house has been because they had under-insured it, and a co-insurance clause applied. This happened when the replacement cost exceeded the sum insured. A typical co-insurance clause provides that if you undervalue your property by more than 20 per cent, the insurance company will pay a proportionally lower sum for any claim.
For example, if the replacement cost of a house is $200,000 and it is insured for only $120,000 and if half of the house is destroyed in a fire and will cost $100,000 to replace, the owner will only receive $60,000, even though the insurance coverage is $120,000.
Not checking the terms and conditions of the policy, especially in relation to risks such as flooding
Generally insurance policies would not cover damage caused by war, nuclear explosion, flood and the unnecessary application of heat. Cover for flood damage is sometimes available at extra cost, but in flood prone areas it may be too expensive or simply unavailable. Home owners with a house located in an area which is subject to potential problems such as flooding or fire, should check the terms and conditions of the policy with their insurance agent or broker.