Avoid the underinsurance trap: reassess your home insurance

     Read our article in the Inside Out Magazine, eversion 

    Surprisingly, many fail to check the sum insured or understand what is covered by their policy. This can be due to the assumption that all home insurance policies are the same. They are not.

    Policies are worded differently and contain different clauses. Some homeowners expose themselves to potentially crippling costs and financial loss by not insuring their homes adequately or not at all. Home insurance is as essential as having a roof over your head, so avoid unnecessary risks. Knowing your cover will help you avoid the risk of being underinsured.

    Underinsurance is a problem that often only surfaces during a claim. The homeowner has an expectation of compensation that is not matched by the amount the insurance company is legally obliged to pay. Hurricane Ivan damaged 70-80% of properties including contents only policies. Consequently, many of those who were underinsured were exposed to real financial hardship.

    How much can you claim for major repairs?
    The rebuild value of your home is different from its real estate or market value. Usually a rebuilding cost is applied to the total square footage of your home (including outbuildings, walls etc.) to produce a value, known as the sum insured. You need to know this to understand how you will be compensated with a claim. It has been known for companies to restrict payment of claim settlements to a wear and tear reductions basis. You must know your policy settlement basis to agree your sum insured.

    Insurance companies may consider that if your insurance cover is slightly out of line with the true rebuild value, they will pay the full claim amount. This margin may be 10-15% but it is discretionary. If you have not had a rebuild value for your property confirmed in recent years, check it out and inform your insurance company of any changes in value: like home improvements.

    Another significant number is your deductible- the sum you have to pay towards repairs. Generally, a higher deductible equates with a lower insurance premium. Deductibles can apply to different causes of damage, like wind or water. This is a crucial part of your insurance cover and if you have any doubts speak to your insurance company.

    Get the best deal by checking out alternative insurance companies. Check their financial resources or independent ratings like AM Best. Also, home insurance premiums can be a major household bill. Some insurance companies allow you to spread this payment, interest free, over a number of months. Ask your insurance company if they offer this benefit.

    You never miss the water till the well runs dry

    Many of us underestimate the value of our personal possessions and how much it would cost to replace them, but disputes or disappointments can be avoided.

    Some people photograph their possessions, making an inventory of items and their value. For single, high value items, tell your insurance company and keep some documentary evidence of value.

    Understand cover variables like “new for old” protection- compensation at current market value.  “All risks” protection for personal items can be considered useful too, when items of value are lost while you are away from home.

    By understanding your cover and what it will or will not pay, you can make informed choices when protecting your home. Finally, remember it pays to shop around for a quote.