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Choosing a home buildings insurance policy



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Make sure you know up front what to expect from your policy


Most people only read their policy from cover to cover when they need to make a claim. Unfortunately, by this time it's often too late. Ask yourself these two important questions: Home building insurance policies that provide hundreds of thousands of dollars in cover may seem sufficient if you think that you will only ever need to claim for limited damage to part of your house. But you should always consider the possibility that your house might be totally destroyed, for example, in a natural disaster such as a bushfire. If this happens, does your policy provide enough insurance to cover the cost of rebuilding your house and any extra (known as 'supplementary') costs you might incur?

If you are not covered for these costs, you may be underinsured, which means you will not receive enough money to cover the costs of rebuilding. How to work out if you're underinsured

Here's what to look out for so you get the insurance cover you need:
  1. Buy enough insurance to cover your rebuilding costs - These costs are for labour and materials.
  2. Buy enough insurance to cover the extra costs - The extra costs of replacing your home include: alternative accommodation while your house is rebuilt; removing of debris from the site; architectal plans; and cost of lodging plans with your local council.
  3. Know what risks you are covered or not covered for

1. Buy enough insurance to cover rebuilding costs


Types of policies you can buy


Insurance companies offer the following types of policies to cover the cost of labour and materials:

Sum insured policyThis is the most common type of policy in Australia. Under this policy you nominate the sum insured, and the insurer agrees to pay costs up to this figure.

If the sum insured is too low you may be underinsured. You will have to pay any costs above the agreed maximum figure yourself. Under this policy it is up to you to make sure you have enough cover.
Total replacement policyThis type of policy covers the total cost of rebuilding your home. Under it the insurer agrees to rebuild you home to its current standard and quality, and there is no agreed maximum figure. The insurer charges you a premium according to what it thinks it will cost to rebuild your home.

This type of policy was rare in Australia and at September 2005, was only offered by one niche insurer. It was only available in limited locations: Perth and country regions in south west Western Australia, Adelaide and rural South Australia, Melbourne and rural Victoria. It is now offered by a further two major insurers.
Extended replacement policyThis policy allows the insurer to pay up to a certain percentage over the sum insured if necessary to meet the costs of rebuilding. Typically, the additional amount is 20%–50% above the sum insured. This type of policy is the current standard policy in the US. It is offered by one niche insurer and two major insurers. The major insurers offer an additional amount of 25% or 30%.
Indemnity
policy		Under this type of policy the insurer only agrees to pay the depreciated value of your house, that is, instead of paying for new materials to rebuild your home (such as a new roof or walls) it will only pay an amount equivalent to the current state of your home. The older your home the lower the amount it will pay.

This type of policy can never cover the cost of rebuilding your house from scratch.
Combined sum insured policy and indemnity policySome insurers offer policies under which they will pay different amounts according to whether you decide to rebuild your house or not. Under these policies the insurer will:
  • pay the sum insured if you rebuild your house
  • pay you a lower amount based on the indemnity value of your home (that is taking into account wear and tear) if you sell your home and move.


Risk of underinsurance


The risk of underinsurance varies depending on what kind of policy you have.

Low riskMedium riskHigh risk
Total replacement policy
You will not be underinsured because the insurer agrees to pay replacement cost without any limit.

Extended replacement policy
The additional
25% or 30%
above the sum insured can
protect you where the estimate of the sum insured was too low or against minor increases in rebuilding costs.		Sum insured policy
You will be underinsured by the amount of any gap between your estimate of rebuilding costs and the actual rebuilding costs in the event of a claim. If your estimate is too low, or if building costs increase suddenly by more than you expect, you will be underinsured.

Combined sum insured/indemnity policy
You may have correctly estimated rebuilding costs. However, you will be underinsured if you decide to move rather than rebuild.

Extended replacement policy - in a mass disaster
Rebuilding costs can increase by between 50% and 100% after a disaster. A policy that only pays an additional 25% or 30% above the sum insured will only provide partial relief.		Indemnity policy
You will be underinsured by the gap between the replacement costs of materials and the depreciated value at the time of a claim.

Underinsurance and how to estimate the cost of rebuilding your home


Reading your policy to see how it covers the costs of builders and materials


To work out what type of policy you have you need to look at both your insurance certificate and the policy document. The policy documents for most insurers includes cover for both your building and its contents.
Unless the certificate specifies a figure for the sum insured, you do not have a total replacement policy and have one of the other three types of policies instead, that is: indemnity policy, sum insured policy or combination sum insured/indemnity policy.

To find out which type of policy you have, you need to find out the section of the policy that sets out how much the insurer will pay. This could be in the introduction to the policy, or in a section with a heading like ‘What we will pay’ or ‘How we will pay your claim’.

You probably have an indemnity policy, if your policy contains statements such as: You probably have a sum insured policy, if your policy contains statements such as: You probably have a combination sum insured/indemnity policy if your policy says that different amounts will be paid in different circumstances. If this is the case, you need to read this part of the policy from start to finish to work what will be paid and when.


2. Buy enough insurance to cover other costs of replacing your home


To see if you have enough cover for supplementary costs you need to know whether these costs are paid from the sum insured or whether they are paid on top of that figure.

If you ever need to rebuild your house, you not only have to pay the costs of labour and materials but will also be faced with a range of extra or 'supplementary' costs including paying for: These costs are described later in this article.

Depending on the circumstances, these costs can really add up quickly. For example, some people who lost their homes in the Canberra bushfires of 2003 were out of their homes for more than 12 months waiting for their houses to be rebuilt.


Insurers cover supplementary costs in 3 ways


1. The costs are included in the figure nominated for the sum insured
Under this approach you need to increase the sum insured to cover these costs. However, you can increase the sum insured by as much as you want to get the cover you need. You will be underinsured if your estimate is too low, or if you only calculate the sum insured as covering the costs of material and labour and do not increase it to cover supplementary costs.

2. The costs are paid in addition to the sum insured
Under this approach the insurer sets limits on the amount it will pay. You will only receive what the policy says the maximum amount is for each supplementary cost. If you actually have to pay more than this maximum figure you will be underinsured.

3. A combination of these approaches in that some costs are paid from the sum insured and some in addition to the sum insured.


Reading your policy to see how it covers supplementary costs


To know how your insurer will cover supplementary costs find the relevant section of your policy document. Look in the section(s) of your policy that deals with when the insurer will pay claims for damages. Information about supplementary costs is often dealt with in a section called 'Additional features', 'Additional benefits' or 'Other costs we will pay'.

Another way of finding the relevant information in your policy is to look in the index, if it has one. Look up ‘accommodation’ for example to find out how the insurer covers extra accommodation costs you may incur.

After you've found the right section of the policy, you need to see how your insurer covers each cost. Insurers use three main ways of describing what they will pay. The following example is what a policy may say about architect fees:

What the policy saysWhat this means
‘We will pay architects' fees up to a maximum of 10% of the sum insured’This cost is not included in the sum insured and the amount the insurer pays is subject to the limitation in the policy.
‘We will pay architects fees from the sum insured and will not pay more than the sum insured.’This cost is included in the sum insured so that when you are calculating the sum insured you need to make an allowance for this cost.
‘We will pay architects fees up to a maximum of 10% of the sum insured unless the sum insured is not used up or exhausted.’The insurer will pay a maximum of 10% of the sum insured but this amount can be topped up if the sum insured is not used up in paying the costs of materials and labour.


Checking what supplementary costs are covered by your policy


Use the following checklist as you read your policy to see:
Type of costCovered in policyHow is it covered?
YesNo Included in sum insured?What is limit or cap stated in the policy?
Accommodation costs
Architects fees
Removal of debris
Making the property safe
Meeting changes to council or building requirements
Garden or landscaping costs
Other costs


Temporary accommodation
Most policies will limit this to: Consider whether you would be able to rebuild within 12 months, and how much rental accommodation for 12 months might cost. Some policies may cover the cost of temporary accommodation for an unlimited period, until your house is rebuilt.

Legal liability
In some cases legal liability cover may end as soon as a claim is paid. This could leave you exposed to risk if there is damage to your property that is dangerous to third parties.

‘…I tried to stop the payment…after I found out that…public liability insurance on the block would cease…I had to arrange for a group of friends to push over all walls standing to reduce the risk…’ One respondent to ASIC's survey on underinsurance following the 2003 Canberra bushfires.

Demolition and removal of debris
These costs could amount to up to 10% of the sum insured, and although they are likely to be covered by your policy you should consider whether the amount of cover is sufficient.

Almost half the respondents to ASIC's survey on underinsurance following the 2003 Canberra bushfires indicated that payments to cover demolition and removal of debris were not enough.

Landscaping
Your need for this type of cover will vary, depending on your property. Some people spend thousands of dollars landscaping their property, but not all policies will cover this type of damage, for example, as a result of fire or flood.

If you have a reasonable-sized garden it is not possible to obtain adequate cover. Nearly all policies have strict limits and do not cover this cost at all or at best for only a few thousand dollars.

Professionals' fees
Fees for professionals, such as architects, engineers or surveyors may be included in your policy, but you should consider whether the amount covered is sufficient.

Information published by the Royal Australian Institute of Architects in 2001 indicated that for simple projects an architect's fees would exceed 10% of construction costs. Fees would be even higher for complex or individually designed homes.


3. What risks are covered by my policy and what risks are excluded?


You can also get two levels of cover for your home under an insurance policy. You can usually choose between 'defined events' or 'accidental loss or damage' policies.

'Defined events' policies are normally standard. 'Accidental loss' policies offer broader cover against loss or damage, and are therefore usually more expensive.

In both types of policy the insurer will only pay a claim when the damage or loss is the result of a cause listed in the policy. The difference is in the range of causes covered by each type of policy.

'Defined events' policyThis policy covers loss or damage from a list of specified (or 'defined') events, for example, storm, theft, fire, earthquake. This is the most common type of home insurance.
  • What is generally covered?
  • What are the limitations on the events/risks covered?
    • 'Accidental loss or damage' policyThis policy covers all accidental loss or damage, with some exclusions
  • What is generally covered?
  • What are the limitations on the events/risks covered?

    • Example: Comparison of cover of accidental loss and defined events policies
    The Chan family has a home building policy. They went away for a week. When they returned their lounge room floor had a number of pools of water on it. It had not rained while they were away, so that the damage was not the result of a storm. They did not know how the water got into their home.

    If the Chans have an accidental loss policy then their insurer will pay the claim, because the cause of the damage, while not specifically known, is something unintended and unexpected.

    If they have a defined events policy then their insurer will not pay the claim, because the Chans cannot show that the damage was caused by one of the events covered in the policy, such as stormwater or vandalism.

    Sometimes an insurer will offer both a defined events policy and an accidental loss or damage policy, and will include both policies in the same policy document. Therefore, make sure you check your policy form (often called a ‘schedule’) to see what type of cover you have actually taken out.


    Make sure you're covered for any special risks


    When selecting a policy you need to consider your particular needs and whether there are any special risks you want to be covered against. For example, you may want to check what cover is offered: You may identify other risks relevant to your situation from reading this guide.


    Importance of home maintenance


    It is important that you regularly inspect and maintain your home. You should also be aware of relevant construction standards in case you decide to renovate or rebuild.

    The requirement to maintain the home in good condition is a common feature of home building insurance policies. This feature can be referred to in your policy under the different headings of: Failure to take reasonable care in the maintenance of your home may result in non-payment or reduction of payment of your insurance claim. Your duty of care may extend to: You should carefully examine the wording of your policy to check what you need to do.

    Lots more information about home insurance

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