Underinsurance epidemic could cost retirees thousands

Aussie property owners could have their homes underinsured by up to 66 per cent.

Are you underinsured?

New research has found that vast numbers of Aussie property owners could have their homes underinsured by up to 66 per cent, leading to devastating financial loses in the event of a claim.

The research by MCG Quantity Surveyors found that some homeowners could be out of pocket hundreds of thousands of dollars.

Marty Sadlier from MCG Quantity Surveyors said the analysis was particularly crucial given that the bushfire and flood season is now upon us.

“This epidemic of underinsurance could prove totally shattering and is due almost entirely to the ongoing use of web-based insurance calculators,” Mr Sadlier said.

“Worst of all, these erroneous calculators continue to be recommended by insurance companies and even government departments, despite long-term evidence of their failings.”

Mr Sadlier said that not only are the calculators constantly in error, but these oversimplified tools exclude fundamental components of insurance that amount to thousands more lost dollars.

“The problem is compounding after decades of being ignored, despite warnings across the insurance and construction industry,” he said.

MCG conducted a review of web-based calculators by comparing them to a detailed professional cost estimation.

“We prepared a report for a new home in Airds, NSW, and calculated the construction cost plus additional sums for demolition, removal of site debris, allowances for cost escalations and consultant’s fees to be $668,559,” Mr Sadlier said. “This figure represents a total insurance value.”

MCG then ran the same information through five popular web-based calculators as recommended by insurance companies – and the variances were staggering.

“The lowest value calculator assessed the insurance value at $226,160 – or 66 per cent below the needed amount, while the highest web-based estimate was $535,000, which is still 20 per cent underinsured.

“Not only do these calculators tend to underestimate construction costs overall, most don’t include amounts for demolition, debris removal, cost escalations and consultant’s fees.”

Mr Sadlier said their example house was not an isolated outcome in his company’s experience, and if these results were extrapolated across the population, the outcome would be devastating for homeowners in need.

“Given the extreme results we’ve observed, any homeowner relying on online calculators could be in dire financial straits after a major insurance event,” Mr Sadlier said.

MCG said that the problem of underinsurance has been decades in the making, but there’s been minimal progress in remedying the situation.

“Unfortunately, little has been done to take these calculators to task and, in fact, customers are being increasingly advised to use them by insurance companies.”

Is your home insurance based on a valuation by a web-based calculator? Are you worried that your insurance assessment isn’t correct?

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    Designated Driver
    30th Oct 2019
    To also compound the situation, they won't insure you for flood insurance in certain seemingly safe locations.
    Looks like the insurance industry are not climate change deniers.
    30th Oct 2019
    True about insurance companies saying some areas are flood prone when they are not. Got sick of hearing they 'go by postcode'. I owned a house in a country town that had some flooding - but my home was on a hill in the town. The local council had a program where you could get a hydrologist report, and this clearly stated my home would never flood, and the insurance company accepted this.
    I also have to wonder about these insurance calculators. My home was built in 2008 for around $235,000. In 2017, wanting to shop around for insurances, I used one of these calculators - which costed the insurance cover I would need as 1.635 million dollars!! A friend working as a broker checked it out, and I had entered all details correct. HOW they could calculate this out - heaven only knows. And of course, the insurance rate was a few thousand dollars. Needless to say I didn't use this calculation, and then sold house.
    30th Oct 2019
    You should not have to insure contents as "new for old", especially as a number of items in your home are not covered for this. It is difficult to get a list of items excluded so you have no idea what is covered for new for old. Contents that have passed their "used by date" should be discounted to a basic amount of cover.
    Designated Driver
    30th Oct 2019
    I think you'll find that there a minimum amount you can insure contents for.
    Something north of $30K.
    30th Oct 2019
    Given that most insurance quotes I have seen for contents insurance ask you to nominate the dollar amount you want to insure, you would be a fool to cost replacement at less than new. And that includes replacing the contents of your wardrobe and every last teaspoon in the kitchen.
    30th Oct 2019
    Find this hard to believe, know of two homes demolished in the last year, both about 32k including electrical and plumber. In my area (Fraser coast) a 4 bedroom 2 bathroom with rumpus room can be built for 350K.
    30th Oct 2019
    Was that 32K to demolish one house? Did that amount cover the entire cost for demolish and removal? My insurer is only allowing 29K for a small house on stumps.
    30th Oct 2019
    I used an on-line calculator, now I'm concerned, who can I trust for guidance on an actual insurance tool?
    30th Oct 2019
    I am insured for a large amount which I queried as being over-insured. My insurance company assured me that in the case of a total loss (including fire, flood and storm) they cover all the costs of remediating the land (ie demolishing the remains, extracting the foundations and disposing of the lot, which could be in the region of $100k), alternative accommodation during rebuild (which could be up to 12 months) and the cost of actually rebuilding a new house to an equivalent size but to a new design of our choosing.. They did not think it over-insured and, on reflection, neither do I.
    30th Oct 2019
    I insure my contents I was told for my Duplex 2b my contents cost me $48.00 a month what do they think my furniture is made of GOLD
    30th Oct 2019
    Just contact a local recognized competent house builder for price to build similar house.
    30th Oct 2019
    One was an older timber home, about 3ft off the ground. quite large though. This one included some asbestos, which needed special disposal costs. The other was about a 30yo brick on slab. Both included total removal costs and a bobcat to clean up .
    Chris B T
    30th Oct 2019
    The other side of being adequately to so called over insured.
    Example a neighbour house burnt to the Ground insured for $450k offered only $320k to rebuild. This price didn't include Mandatory Replacement Upgrade of Septic System with Rebuilding/Renovating at a Price Point. It didn't include Replacing Solar System, Reconnecting to Electrical Grid (Fire Damaged Pole).
    Paying this excess insurance payments for Years.
    The elderly couple didn't rebuild and moved to a home unit.
    As a stroke of luck on there side managed to sell land for decent Price.
    Insurance is a necessary evil, hope you never need it but can't afford not to have it.

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