Avoiding over-insurance

“You have too much insurance,” said no insurer ever… Or do they? YES! The truth is - you don’t want to be over-insured. Here’s what you need to know. 

The risks of being under-insured are well documented and it’s imperative that you have sufficient cover for your investment property. What isn’t as widely documented are the risks over being over-insured. 

Over-insurance – what is it?  

It is basically where the property is insured for more than it would actually cost to replace. For example, say you nominate a sum insured of $1 million for the building, but the actual cost to replace it is $750,000.  

Why is over-insurance a bad thing? 

For one thing, it’s a waste of money. The more a property is insured for, the higher the premium. So, if the property is over-insured, you’re likely to be paying too much for your policy. You’ll be paying a premium based on a higher figure than you could recoup. 

Why can’t I recoup for the total sum insured they nominated? 

Most insurers will only reimburse you for the actual cost of the loss you have suffered.  

Let’s return to our example… 

Say you have insured the property for $1 million. The property experiences a total loss due to a fire. Based on the actual repair and/or replacement costs, the insurance assessor determines that to repair the property to its pre-fire condition would cost $750,000. Your insurance pay-out will be based on the assessor’s value, not the $1 million for which the property is insured. So, in effect, although you have paid premiums based on the property being worth $1 million, in reality it’s valued at $750,000, and that’s all you will get from the insurer. You will not receive the extra $250,000. Basically, you’ve paid more for no benefit. 

Insurers will also not usually refund any premium overpayment (they won’t reimburse the difference between the higher premium you paid and the actual premium you would have paid if the sum insured had been accurate).  

Why do insurers do this? 

Many insurers will have a clause in their policy that relates to over-insurance: “if you over-insure, we will not pay you more than it costs us to rebuild, repair, or replace. We will not refund any premium overpaid for over-insuring…” 

Regardless of the policy wording, an insurer is generally only obliged to pay-out the value of the property that has been lost or damaged. This is because the policyholder may be tempted to profit from a loss – this constitutes a ‘moral hazard’ for the insurance company.  

It is ultimately considered deceptive behaviour. For example, a policyholder over-insures a property and pockets the difference between the actual loss and the insured value. That’s why there are safeguards in place, like the over-insurance clauses, to discourage it from happening. 

Getting the sums insured right 

When taking out landlord insurance, it is your responsibility to ensure the sums insured are correct. The aim should be to purchase the right cover and at the right price. That means getting your sums insured right so you have adequate cover. 

Here are some tips for determining the sums insured 

• The sum insured relating to the building should be based on the cost of replacing the building structure itself, its fixtures and other features like sheds, decking, driveways, pool, and fencing. 

• Base the building sum insured on current building costs, not on its market value (what the property could sell for) as this valuation isn’t based on replacement costs.  

• The sum insured for contents should be based on your contents at the rental – not your tenants’ possessions. Your tenant requires their own contents insurance policy. 

• If you own property within a strata complex, check to see what’s covered under the body corporate’s strata insurance so you can work out what needs to be insured separately.  

• Use an online calculator such as the Cordell Sum Sure building insurance calculator and the Home Content calculator found on the ICA’s website. 

• If you want precise rebuilding figures, get a quantity surveyor or local builder to do a costing. 

• Regularly review the sums insured. Replacement costs (both for the building structures and for the contents) change over time, so it’s important to base sums insured on current figures when taking out or renewing your policy.  

If you are doing your own calculations 

• Do not include the cost of the land, just the property/structures built on it. 

• Ensure the calculations are based on current building costs and allow for current building standards to be implemented including risk mitigation requirements (e.g. bushfire, flood or cyclone proofing). 

• Factor in structural improvements that have been made to the property, like sheds, pergolas and fencing. 

• Include the cost of removing debris, and the cost of architect and council fees. 

• Don’t forget GST. 

If you have questions about insuring your investment property, get in touch with a member of our Expert Care team. 

*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are here, contact 1800 661 662 if you have any questions.