The lesson still not learnt from natural disasters

A national crisis of underinsurance could cripple communities permanently, according to new research.

underinsurance

Insurance claims from Australia’s bushfires are estimated to exceed more than $700 million, with the Insurance Council of Australia reporting that the estimated damage bill from bushfires had doubled in just two days earlier in the week. And the fires across the country are expected to burn for months.

But a national crisis of underinsurance could cripple communities for years, if not permanently, according to research from the University of Tasmania.

The research paper says that while much was learnt from Victoria’s Black Saturday fires in 2009 and the Ash Wednesday fires in Victoria and South Australia in 1983, a lesson still not really learnt is that home insurance is rarely sufficient to enable recovery.

The evidence is that many people losing their homes will find themselves unable to rebuild, due to lack of insurance, the paper says.

“We know this from interviews with those affected by the October 2013 Blue Mountains bushfires (in which almost 200 homes were destroyed),” say authors Chloe Lucas, Christine Eriksen and David Bowman. “Despite past disasters, more than 65 per cent of households affected were underinsured.”

Research published by the Victorian government in 2017 estimated that just 46 per cent of Victorian households had enough insurance to recover from a disaster, with 28 per cent being underinsured and 26 per cent having no insurance.

“The consequences aren’t just personal,” the academics argue. “They potentially harm local communities permanently, as those unable to rebuild move away. Communities lose the vital knowledge and social networks that make them resilient to disaster.”

Writing for The Conversation, the authors say that all too often the disaster of having your home and possessions razed by fire is followed by the disaster of realising by how much you are underinsured.

“As researchers into the impact of fires, we are interested why people find themselves underinsured,” they say. “Our research, which includes interviewing those who have lost their homes, shows it is complicated, and not necessarily due to negligence.

“For example, a woman who lost her home in Kinglake, north-east of Melbourne, in the 2009 fires, told us how her insurance calculations turned out to bear no resemblance to the actual cost of rebuilding.

“‘You think okay, this is what I paid for the property,’ she said. ‘I think we had about $550,000 on the house, and the contents was maybe $120,000.’ It was on these estimates that she and her partner took out insurance. She told us, ‘You think sure, yeah, I can rebuild my life with that much money. But nowhere near. Not even close. We wound up with a $700,000 mortgage at the end of rebuilding.’”

The authors says a common issue is that people base their insurance figures on their home’s market value, but that rebuilding is often more expensive.

“For one thing there’s the need to comply with new building codes, which have been improved to ensure buildings take into account their potential exposure to bushfire. This is likely to increase costs by 20 per cent or more, but is rarely made clear to insurance customers.

“Construction costs also often spike following disasters, due to extra demand for building services and materials.

“A further contributing factor is that banks can claim insurance payments to pay off mortgages, meaning the only way to rebuild is by taking out another mortgage.”

Underinsurance often means that those who lose their homes will move away, hampering the community’s recovery.

“In Whittlesea, for example, residents reported a change in community cohesion after the Black Saturday fires,” say the authors who were told by one interviewee that the newer people coming in weren’t invested to the same extent as the people who had left.

“If communities are to recover from bushfires, the nation cannot put its trust in individual insurance policies. What’s required is national policy reform to ensure effective disaster preparedness and recovery for all.”

Further University of Tasmania research reported on The Conversation shows that households aren’t making the connection between insurance and climate change, with Australians generally assuming that disasters will not affect the price of insurance.

The researchers say households in rural and regional areas are more likely to be insured than those in cities. They say this is because rural residents are more attuned to environmental conditions. In cities, residents can feel less connected and less exposed to environmental changes.

Are you guilty of underestimating replacement values in your home and content policies to save a few dollars?

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    COMMENTS

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    Horace Cope
    8th Jan 2020
    11:29am
    "Are you guilty of underestimating replacement values in your home and content policies to save a few dollars?"

    That's a very interesting question and I find it difficult to answer. For years we accepted the automatic increase by our insurer(s) for home and contents with a commensurate increase in premiums. When the premium jumped from about $1,000 to just under $1,500 we started the comparison routine. Surprisingly, when we described the house and disclosed the area the value of the home and contents as assessed by the various companies differed from the current insurer by about 1/3rd. When we got back to our insurer, we were told that to decrease the values would leave us underinsured even though all of the other comparison companies agreed mainly on the lower figures.

    Now, here's a frightening fact that may not be well known. Say you insure your home for $500,000 and it is lost, the amount of payout may not be $500,000. If the insurer deems that the property is underinsured it will deduct the amount of underinsurance from the payout figure. If they deem that the home is actually worth $650,000, your payout drops by $150,000. It's interesting that when a house purchase is made that the insurance cover is for the purchase price, not the cost of the purchase minus the value of the land.

    When did insurers decide that they would control the lives of those insured with them and are unfortunate enough to call on the insurer to compensate for damage to their property? It used to be the position that in the event of a complete loss that the insurer paid out the agreed amount and let the client decide the next course of action. Now insurers arrange for the property to be rebuilt in accordance with the original plans and in most cases they choose the builders. May we, and those who read this, never have to call on the insurer.
    Rosret
    8th Jan 2020
    1:03pm
    The insurance is for the house, fences and garage only - not the land. Where did you hear otherwise?
    What is catching out a lot of people is they maybe insured for the rebuild of their home as it was built. However the insurance company and council rezone after a fire and insist the house is built to a fire zone standard. This is hugely more expensive. There is also the need to find other accommodation for an extended length of time and anyone who lives in a coastal region knows that is incredibly prohibitive. Retirees maybe able to move to a cheaper area however anyone who works in the region have a double whammy.
    KSS
    8th Jan 2020
    1:57pm
    Yet again this is a warning not to just roll-over any insurance. For home insurance you need to have proper valuations done including the rebuild costs (and that would include any new compliance requirements in the Building Code) and not just the sale value.

    Content insurance is all well and good until you have to replace every teaspoon, pair of socks, sheet, towel, food-stock, all those cleaning products under the sink, CD, DVD, kids' toy etc as well as the obvious big ticket items like a bed, lounge, table, TV etc. Even those renting should have content insurance and this may well include furniture as well as for their personal posessions. The actual building is the responsibility of the landlord!


    Much like travel insurance, if you can't afford the home and/or content insurance you can't afford the home.
    Horace Cope
    8th Jan 2020
    3:18pm
    Thanks Rosret, my point about the land was that insurers expect one to pay for the amount paid for a property (assuming free standing) as the amount insured when in actual fact, a property is comprised of two components; land and improvements. Surely one should only insure improvements and pay a premium according to the assessment of the improvements. BTW, our fence blew down in a storm many years ago and that's when we discovered that fences weren't covered by that company. Like a lot of others, we didn't read the policy which was before the Plain English laws were legislated.
    *Loloften*
    9th Jan 2020
    8:12am
    Thx for the "heads-up" HC - did not know that ANY $ amount could be deducted from the total of my Home/Contents Insurance.
    Anonymous
    9th Jan 2020
    8:20am
    Amazing Horace - if you insure for $500k, you insure for $500k - not $350k because they claim it is 'under-insured'.....
    Anonymous
    9th Jan 2020
    8:21am
    .. so let's get this clear - if the rebuild costs an extra $150k, and they deduct $150k - you are out of pocket by $300k?

    If that is the case - how were they allowed to get away with this? It's called daylight robbery.
    *Loloften*
    9th Jan 2020
    8:31am
    PS: HC, my insurance provider estimates the $value of my house + their minimum (my choice) re Contents, mainly just furniture/appliances/curtains/floor-coverings. Luckily I live in the Burbs, approx 20kms from CBD, no horrible fires anywhere near here for the 45+yrs since. Bit concerned, not for me altho' surprised as per above, that an Insurance Co can deduct if home insurance under-estimated, especially when they have done/still do, the estimation. Was also surprised when received my annual car insurance bill a few days ago - nothing's changed, however it's increased by almost 10% - banks/home insurance/health insurance!!?? We appear to get whacked by all.
    Franky
    8th Jan 2020
    1:49pm
    I stopped insurance on my home when the premium rose over 2000$ with excess of 5000$. I spend the money instead on maintenance and prevention. I live in a cyclone area, no chance of bushfires in the wet tropics. Sure, it's a risk, but a calculated one.
    Eddy
    8th Jan 2020
    7:51pm
    A few years ago I questioned my insurance company about the insurance valuation they offered and the cost of the premiums for both building and contents. I thought them excessive. I received a relatively detailed breakdown on what it would cost in the case of a total loss. This included an estimate of something like $150k for re mediating the land (ie demolishing and removing the remains of the house and removing the existing footings etc) and the cost of alternative accommodation for at least 12 months. This was in addition to the cost of rebuilding an equivalent dwelling to contemporary standards (we were permitted to chose a different design to the original). Upshot was after comparing with other insurers I was satisfied the premiums I paid were appropriate. People just have to be careful and, if you use a comparison site, be sure of with what you are comparing. Ask questions.
    aussiecarer
    8th Jan 2020
    8:15pm
    Don't count on insurance to replace your home even if you honestly think you have insured it at the correct replacement value (as opposed to being under-insured). My brother and his family lost their home in the Yarloop bushfires - these bushfires destroyed 97 homes in Western Australia a few years ago. Ten years before the fire they had insured their home for $200,000 - at the time they took out the insurance the market value of their home was about $120,000 and they had factored in $80,000 to cover the extra cost of rebuilding their home from scratch in a rural area - it costs more to transport materials, get tradies to travel from the city to rebuild etc if you live in a rural area.

    After the fire, they assumed they would get $200,000 to rebuild - because they had been paying annual premiums on the value $200,000. However then the insurance company hit them with a bombshell. The insurance company claimed that they had insured their property above the current market value of what similar homes were selling for before the fire, and the company said they would only pay the market value which they said was $60,000. The $60 000 payout didn't even cover the family's remaining mortgage.
    It is beyond anyone's control that many homes in WA are now worth half of what they were when people bought them 10 years ago. The loss of their home was unavoidable - every home in the town burnt down with the exception of one. The only house that remained in the whole town survived because the homeowners happened to have a bore, a fire fighting pump and their own generator. Everyone else in the town was dependent on the scheme water to protect their homes and the scheme water and electricity failed several hours before the fire engulfed the town. My brother, his wife and their 5 children felt betrayed by their insurance company. They ended up having to sell the burnt out land for next to nothing, and they have had to start over in another town - mortgaged up to the eyeballs, when before the fire they only had a $60,000 mortgage. They have never insured anything since.
    KSS
    9th Jan 2020
    7:28am
    So although they didn't get what they expected, they did get $60,000 which would have paid out their then existing mortgage. Plus they sold the land, albeit for less than expected, which at least gave them something towards the next property. They may be 'mortgaged to the eyeballs' now, but if the same thing were to happen again (or perhaps a flood instead of fire, or a cyclone, extensive storm damage etc) they will be even worse off.

    This is another case where constant vigilence of their home valuation and insurance would have been beneficial instead of simply rolling over the insurance. Things change. Insurance of any kind can never be 'set and forget'. And with each year, a thorough reading of the policy PDS is also required to ensure you are actually overed for what you think you are (or should be).
    Chris B T
    9th Jan 2020
    12:28pm
    Arrogance comes to Mind With Insurance Companies.
    Eg. I bought a Dwelling for $420k (House and Land) most insurance companies Insisted $800k
    to insure.
    I finally found 1 to insure for $450k.
    As stated House and Land was $420k.
    I did a Goggle search for Replacement of Total Rebuild approx $460k. using basic costs.
    I sincerely hope there be no need to make a claim.
    This underinsured/overinsured are the things of Nightmares when one is still trying to Recover. Not Needed Ever.

    9th Jan 2020
    8:18am
    Excellent timing - went to the site for a re-build yesterday to help unload some materials from Sydney - getting all the info via chat, and it seems the insurance company took $6000 from the payout to pay for an 'asbestos check' - the owner said he built the place and he knew there was none, which was the outcome. Anyway - I figured that if they sent in a 'contractor' at $1000 a kick - they'd pocket $5000 off the top of this elderly couple's claim. Do that with 400 claims and you've 'earned' $2m.... five thousand bucks saved is five thousand bucks earned..

    Disgraceful conduct by insurance companies - who are also demanding a full reckoning from people in flight, of their contents... and proof that it is as they claim...
    Never been the same since the assetholes in the Car government here gave in to insurance companies and let them get away with huge increase and chopped 'services' - in order to remain 'viable'. I note not one of their honchos or shareholders is 'non-viable' ....
    Another clear example of the 'privatised business model' without public sector competition(GIO etc) failing to produce the goods.
    Anonymous
    9th Jan 2020
    8:24am
    Oh - and the fire hydrant is in my front yard... just outside anyway - personal fire hydrant... got the door all cleaned and oiled in case..
    Anonymous
    9th Jan 2020
    8:24am
    .. always thought it was a pain in the asset having to mow around it....
    Lookfar
    12th Jan 2020
    11:39am
    Aah Trebor, with natural disasters, it is often the electricity that goes first, and you know that big concrete tank on the hill above your town - your water supply? - what keeps it full? electric pumps,, so with the entire town filling every bucket and soaking their walls, lawns, - anything, with water, how long will water be available to your fire Hydrant?
    So you need to store your own water, preferably an underground tank, 20,000 gallons or so, and your own electricity stored also to keep the sprinklers on when the powerpole down the road burns down.
    And remembering that fires take all the oxygen, you have to have batteries, not rely on a petrol or diesel generator. (a very small very efficient one, in the Laundry or just outside, can be back-up just to supplement the batteries if the power goes down too soon)
    On the positive side, you can use that water as a heat sink/source, - run the heat from your fridge and your air-con into it in summer, and out for heating your house in winter, - all those appliances are using heat pumps.
    And attach your Solar panels to the batteries and you will save even more money on electricity as you can run your house at night also.
    Of course with each extra precaution the cost of insuring your house, and the increasing difficulty in valuation, guaranteeing insurance will be short paying you big time for under or over insuring.
    Then you will meet the twofaced aspect of insurance companies, one face being the sales department, - friendly and helpful and finding lots of ways to help by charging you more and more money, whilst also feeding you just a bit of fear and uncertainty to loosen up your purse strings even further, then the Claims department , - the demonic face, absolutely paid only to reduce claims, escape claims, diss you, blame you, blame the Government, the greenies, the rich shareholders, who will say anything, try anything, to not pay you or pay you much less.
    This is the face of Economic rationalism, an economic theory that is taught as truth, but it is not rational from the majority point of view, - transferring all the poor peoples' money to the rich people is only rational if you happen to be very rich, - objectively it is just immoral and societally destructive Greed, - yes, daylight robbery as noted above but even worse, catastrophic for our future.
    At some point in your protection of your house, - screens for the windows, plants near the house only cactusses, etc, you may decide you have more chance of surviving a bushfire than risking your future to the slimy tentacles of the insurance company, - and probably by then you will be able to do without commercial electricity, so that is two big bills gone, Insurance and electricity.
    Unfortunately Mr Morrison is ahead of you, he is now planning legislation to declare an area 'unsafe' 'unable to be defended; 'precarious water supply' etc. so you would be forced to leave, "for your own good" even if it isn't.
    Bad enough a govt that does virtually nothing, but for it to plan to kick you out of your own house is more than just adding insult to injury.
    To make matters worse a friend sent me a video alleging that the shortage of water is not just the drought and heatwave but fracking in the Artesian basin, - I don't know enough to judge but I dread him being correct. https://youtu.be/PBsFVn-kKV8
    All that Happy New Year ing is feeling a bit hollow..