Smart Investor: Does your house insurance really have you covered?

Smart Investor: Acid Test, March 2011

Does your house insurance really have you covered?

Are you covered for flood? Yes/No

We all know why it’s so important to ask this question now. Many of the Queenslanders who have suffered so much in recent months will have been uninsured, because there are large swathes of Australia for which it is impossible to get flood cover – for the simple reason that insurers know these places will inevitably, and frequently, flood. (Insurers, in turn, say they have long advised developers not to build in certain areas, and have been ignored.) Availability of flood cover depends very much in the place you’re in, and on data on how frequently it is likely to be inundated. Be sure you have checked your policy and are clear on what is and is not covered.

Do you think your contents insurance is adequate? Yes/No

There is a marked tendency to understate what you own – and even if you get it right at the start of a policy, it is human nature to accumulate, so for most people it doesn’t take long for contents coverage to become inadequate. If you really want to be able to get everything back in the event of disaster, it pays to take stock and look afresh at the value of what you own.

Do you have documents to prove what contents you own? Yes/No

Having coverage is only half the battle. Being able to convince your insurer that you ever owned the things you are claiming for – that’s a whole other challenge. Receipts clearly help enormously, or valuation certificates where appropriate; and why not take pics? Digital photography is free (and easy to back up somewhere other than your home). Keep in mind that if there is a fire, there’s not much use if your receipts were right next to the items you were hoping to prove ownership of – the receipts will be the first things to take light. Store them at a family member’s home instead.

Are you covered for your household items when they’re not in your house? Yes/No

As more and more of us tend to blur the lines between home and work, we also tend to take a lot of stuff out of the house and the office too. The prime example is the laptop computer. Be clear on whether you’re covered if you lose or damage your goods in transit – not on an overseas trip, which you will likely have covered separately in a travel policy, but from day to day.

If you’re letting your property out, do you have landlord insurance? Yes/No

This is the classic example of the cover you don’t know you need until you really need it. If you have a tenant who suddenly refuses to pay or to budge, you have a world of trouble ahead: the legal process of sorting that out is very onerous and in the meantime you have a mortgage and no rental income to cover it.

Will your household cover really let you rebuild? Yes/No

Home owner policies come in a number of flavours. The most comprehensive are called total replacement policies, or a further variation, extended replacement policies. These not only cover the projected cost of a rebuild of a house, but up to 30% above it, in case, for example, the cost of building materials have moved up dramatically during the course of your policy. At the other extreme are indemnity policies, which are much less likely to cover a full rebuild, because they depreciate. Then there are sum insured policies, covering a flat fee, which are likely to be left behind by inflation; insurers may offer an option to index these to inflation (or more usefully to the cost of building materials). ASIC’s FIDO consumer website has an excellent section helping you pick your way through your policy wording if you’re not clear what sort you have.

If you have to rebuild, are you covered for where you’ll live in the meantime? Yes/No

Another area that’s easily overlooked in a new policy but is crucially important: are you covered for alternative accommodation when a rebuild is necessary, and what precisely is the nature of that accommodation? Is it a set weekly fee, or is there an explicit statement of the quality of the accommodation?

And how about for other costs? Yes/No

Other easily forgotten elements of a rebuild include demolishing what’s left of the original home, removing the debris from the site, and lodging rebuild plans with local council. Again, this will vary with the policy.

Are you comfortable with your exclusions? Yes/No

Few policies cover everything. Some, for example, will pay out less if you have left your home vacant for an extended period. Some, in high-crime areas, will have caveats over coverage for crime (which might come down to, for example, an expectation of a minimum standard of locks). Some cover defined events, embracing storm, theft, fire, earthquake and so forth, while some instead take a blanket approach to accidental loss or damage. The point is to be very clear on what you are covered for and to be comfortable with whatever is missing.

Are you meeting your own obligations in your home? Yes/No

For example, most household policies require you to maintain your home to a certain minimum good condition. More specifically, this might include keeping your roof in good shape, sorting out blocked drains as soon as you notice them, and complying with any changes in fire safety regulations.

Mostly yes: You’re covered. Sleep soundly.

Mostly no: There’s no point having insurance if it’s not going to cover you when you need it. Take a fresh look.