Home Protection
Sydney Morning Herald
Tuesday April 9, 1991
THE high incidence of natural disasters over the past year has emphasised the importance of buying the correct level of home building insurance.
Over the past 12 months home owners have been subjected to hundreds of millions of dollars worth of damage from hail storms, earthquakes, bushfires and, more recently, a thunderstorm "downblast" (the technical term for the storm that occurred on the North Shore).
While this has resulted in an increase of up to 20 per cent in the cost of building insurance, the losses also have served to highlight the dangers of being lax about such important insurance cover.
For most people their home represents their life's savings and financial security and while one would expect home owners to take care in protecting their chief asset adequately, this is often not the case.
According to Mr Chris Henri of the Insurance Council of NSW, many of the disaster-struck areas, such as Newcastle, were under-insured by up to 50 per cent with elderly home owners holding "ancient types of contracts like indemnity policies".
"People also tended to expose their own equity to risk, taking only sufficient cover to protect the amount owed to the mortgagee," says Mr Henri.
For these under-insured home owners financial recovery will be difficult and distressing. Homes damaged or destroyed in a matter of minutes are likely to face costly repairs, and owners who don't have the cash at hand to pay for it will be forced to sell and seek cheaper accommodation elsewhere.
What then should home owners do to protect their most important asset? Here are a few key areas to focus on when selecting insurance:
* be aware of the difference between indemnity and reinstatement and replacement policies (R & R) - and avoid indemnity policies;
* take time and effort to insure for the correct amount;
* know which events you are insured for. You are not covered for everything;
* understand how companies deal with under-insurance;
* take into account the special features offered by each company - its discounts, bonuses or excess requirements; and
* choose a company with a good track record of making payments.
While it is penny wise and pound foolish to under-insure, it's also unwise to buy insurance purely on the basis of premiums alone. Generally it's best to take the policy that offers the widest cover and has the least exclusions.
And now to explain those key areas.
Indemnity and R & R insurance differ significantly. The former dominated the industry before the 1980s but has been since replaced by better R & R policies.
Indemnity policies insure you only for the depreciated value of your house and therefore offers very poor cover. The older your house and the larger the claim the more severely out of pocket you will be. For this reason many companies no longer offer indemnity insurance.
Replacement insurance puts you back in the same position you were in before the event.
With this, if you suffer a total loss, providing you insured for a sufficient amount, you will be able to rebuild your house to what it was. This policy is also referred to as "new for old".
Unfortunately, consumers are often attracted to indemnity policies because their premiums are lower but fail to recognise it's because the sum insured is based on a depreciated (and consequently lower) amount.
Even with an R&R policy, consumers can leave themselves vulnerable and exposed if they do not do their homework carefully and insure for the correct amount. The onus is on the consumer to do this properly.
All companies provide a valuation guide to help you arrive at a full replacement cost. It's important you use this aid (ask for one if they fail to supply it) as it will pre-empt lots of possible future arguments.
Once you know the size of your house their tables will help you work out the per square metre rebuilding costs. Each company structures these calculations slightly differently. Some include the additional expenses associated with rebuilding in their per square metre costs, while others add them on separately.
For example, AMP includes the cost of the removal of debris, architect's fees and temporary accommodation in their per square metre construction costs, while Westpac adds these on separately as 10 per cent of the sum insured.
Additional expenses include: the costs of determining the cause of the damage; removal of debris; architects, engineers and surveyors fees; costs incurred meeting statutory requirements; and temporary accommodation.
You also need to include special features such as: granny flat, garage, shed, carport, patios, fencing, pathways, underground services, sauna, in-ground pool (above ground pools are home contents), wall coverings, tiles, linoleum (carpets are home contents), awnings and fixed appliances such as air conditioners.
Once you have totalled all these up you have arrived at a realistic sum insured. There is no such thing as something for nothing - so if you leave something out (and hence underinsure) you will find yourself out of pocket.
The insurance company never pays more than the sum you have insured for. Thus if you have insured your $200,000 house for only $125,000, you will be$75,000 out of pocket if it is destroyed.
But total losses are rare and the vast majority of claims are for partial damage. And here, too, you need to have been realistically insured.
Most companies apply the "average clause" or "co-insurance clause" to protect themselves from people who under-insure in order to pay smaller premiums.
But they do allow for a margin of error. If the sum insured, nominated by you, is less than 80 per cent of the true value of your home they will apply the following formula: A multiplied by S divided by P.
A = the amount of the claim.
S = sum insured nominated by you.
P = 80 per cent of the true value of the house.
So if you suffer damage of $50,000, were insured for $60,000 but the more realistic sum is $100,000, they would calculate: $50,000 x $60,000 divided by 80 per cent of the true replacement value of $100,000 (which is $80,000). Thus the amount they would pay is only $37,500, leaving you to pay $12,500.
However, not all companies rely on the average clause to force their customers to insure for the full value. Westpac, for example, will pay a partial claim in full but only because it relies on tighter underwriting procedures.
"We don't like the average clause at all but we go to great pains to have a realistic sum insured instead," says Mr Tony Rodgers, chief marketing manager at Westpac Insurance Services. Home owners also need to know what they are insured for. Home building insurance does not provide protection against every eventuality.
Under a standard defined events policy the following are covered: storm, lightning, fire, theft, malicious acts, falling trees, water damage, riots, earthquakes, landslide, breakage of fixed glass, fusion and legal liability.
Having said that, there are qualifications and exclusions for each and every event.
For example, if a storm blows your tree over and it damages your house you are covered but if it blows your gate and fence over you are not. If the tree collapses because of tree lopping you are not covered.
Water damage also can be confusing. You are covered if you leave the tap on and it floods your house but if through negligence you allow water pipes to rot and cause damage to walls and floors, you will have your claim knocked back.
No insurance company will cover you for wear and tear or poor maintenance.
The GIO's Mr Alan McFarlane says he can tell from the claims he gets that people haven't read their policies: "Insurance is a low interest subject. People buy it, but don't read it. They often put in claims for things that aren't covered.
"People are covered for storm and tempest. If water pours in through the roof, the storm has to have damaged the roof. But you get claims for maintenance problems - where the tin roof is rusted, tiles are broken or the skylight has deteriorated and there is water damage. It's a defined event policy and one of these events must occur before a claim is accepted."
Home owners are not covered for floods either. If you live near a lake, river or creek and heavy rains cause it to flood you are not insured for the damage it causes.
Cover for burglary and malicious damage is also limited. If your tenants or their friends steal and vandalise your house you are not covered and will have to make good the damage yourself.
Subsidence and landslide are only covered if they arise immediately from an earthquake or explosion.
These are only some examples showing how defined events are limited to certain circumstances. Thus, studying the exclusions first can be a good way to start reading your policy and be clear about its limitations.
Defined events policies are pretty standard and don't differ that much from company to company, however there are slight differences which may be of importance to you.
For example, most policies offer legal liability cover to home owners and their families. While GIO and NRMA cover you for claims arising from events confined to your property only, AMP and Westpac offer wider cover, the former worldwide protection and the latter Australia only. While all of them cover you and your family for $5 million, AMP offers only $2 million - but then it is worldwide.
The NRMA, GIO, AMP and Westpac include cover for breakage of fixed glass and fusion of electrical motors (like air conditioners). There are slight differences here, too. GIO customers can elect to leave either of these items out and save themselves $11.15 per annum on each. While all of them except the NRMA will insure motors of any age, the NRMA takes depreciation into account at 10 per cent per annum.
All the policies cover the cost of temporary accommodation if your house becomes uninhabitable as a result of damage - usually up to 12 months or 10 per cent of the sum insured. Some, like AMP and GIO, specifically include pets as well, although the NRMA appears to offer it as well.
If your property is rented out and the damage results in loss of rental, the insurer will make good that loss - usually 10 per cent of the sum insured
Finally there are the discounts, bonuses and excesses - all of which should be looked at in relation to the premiums when comparing costs.
AMP gives you the choice of three excess amounts: nil, $50 and $100, with the cheapest premiums operating on the highest excess.
For the purposes of the survey, AMP premiums for the $50 excess have been used so they can be compared with GIO and Westpac. The NRMA has no excess system. Following a claim, customers lose their no-claim bonus and premiums go up by a third the following year.
Premiums on a $250,000 brick house, for example, will increase to $372, making it more expensive than GIO (to make it a fair comparison you need to take GIO's premiums, $301, and excess, $50, together: $351).
AMP recently has introduced a 10 per cent no-claim bonus similar to the NRMA while retaining its excess options mentioned above. This will make them even less competitive.
GIO gives their "gold" customers - those who have not made a claim for five years - an excess free year.
Most insurers have higher premiums for timber and fibro houses as they are prone to larger numbers of claims than bricks. However, Westpac has one premium for both. Thus if you have a timber or fibro house you may be better off insuring with this company since these premiums are cheapest in almost all instances.
Finally, there is the question of discounts. GIO has just introduced a 5 per cent discount for customers who take out home contents and building insurance together. But even without a discount there can be some benefits. For a start you need only put one claim in if you suffer damages under both policies from the same event. It will also be more convenient dealing with one assessor.
AMP says there can be other advantages "if the one policy is insured for more than it should and the other less - it's easier to make adjustments and settle the claim".
Special discounts are offered for retirees and people over 55 years. AMP offers 15 per cent for customers 55 and over and GIO offers 5 per cent for retirees.
Mostly, you can rebuild and repair your home in any way you like: changing the materials, plans, size or site so long as it does not result in a greater cost. If it does you have to pay the difference.
BUILDING REPLACEMENT INSURANCE - WHAT THE PREMIUMS COST
NRMA GIO AMP Westpac
Home's Timber/ Timber/ Timber/ Same
value Brick fibro Brick fibro Brick fibro premiums
$80,000 165 163 177 195 233 248 171
$150,000 212 225 234 273 329 379 244
$200,000 245 270 268 329 374 472 266
$250,000 279 314 301 385 434 566 316
Premiums are the same throughout Sydney. GIO, AMP and Westpac have a $50
excess. The NRMA operates a bonus system instead. Once a claim is made the
premiums go up by a third. The premiums shown in the table are for homes where
no claim has been made in the previous 12 months. AMP now has a bonus system as
well. Premiums go up by 10 per cent after a claim.
© 1991 Sydney Morning Herald