Surely our insurance covers this?

This is the most common question we are asked when things go wrong. And most people asking the question are upset because they are facing a financial cost they hadn’t budgeted for. People cope with small costs and don’t even think about insurance, but when large ones hit, you find out a lot about your insurance cover and not all its good news.

Before you read on, we want you to understand that we are not giving insurance advice. We are not insurance experts, and these summaries may not apply to your situation. This information is of a general nature only and intended to encourage you to talk to an insurance advisor and ask questions about how best to protect your property and yourself.

There is no blanket cover.
Before insurance pays out for your loss, what you have lost must be insured. Sounds obvious. That’s not always the case. The first mistake people make is thinking that contents insurance covers all contents. That’s the same for landlord insurance which doesn’t necessarily cover everything a tenant can or fails to do. My point is that there is no blanket property insurance.

When you take out insurance, the insurance policy will list things not covered, it will list events not covered and it will often list values of things above which it won’t cover.

Not all events are equal.
Just as insurance doesn’t cover everything, it won’t cover every event. So, you may be covered for your house burning down but not for a flood. It is all about probabilities. Insurance companies collect data on how often something happens and when it does how much it usually costs. With that info for example, they can work out if they were to cover 100,000 people for their TV being stolen. They know how many TV sets will be stolen during an average year and how much those TVs cost. From there, they work out their premiums.

When a property has a higher-than-average probability of something happening, like flooding, because a house is built in a flood zone, they might calculate a ‘special’ premium to cover it. Or they might say, it’s too hard, we won’t cover you.

But I can’t replace it for that.
Many policies don’t replace new for old, particularly contents policies. If a carpet is 15 years old, and something happens, they will depreciate it and only pay a portion of its replacement cost. The assumption is that you were ‘wise’ and had been putting away a portion of the cost of new carpet each year, so when it was due to be replaced, you have the money set aside.

The insurance company may also list upper values for some individual items. So, suppose you have antique furniture or jewellery that is special to you and hard to replace. In that case, policies usually cover a set ‘average’ value. If they are more valuable to you, you need to talk to the insurer and get the policy extended.

Not paying full replacement cost allows the insurer to charge a lower premium. Lower premiums, less cover, good to remember. Its not always the case but cheap insurance is cheap for a reason. Find out why and be sure you can live with it.

You can’t be the problem.
Insurance companies don’t trust you, at least not blindly. There is a concept called moral hazard. If you had an insurance cover for carpet loss and then thought to yourself, ‘

‘I don’t need to get the roof fixed; I have insurance.’

Then think again, they won’t pay if your cover makes you take risks that you wouldn’t have taken had you not had insurance. It all goes back to probabilities and exposure. You can’t take out insurance and then increase your risk. Now you might be a risky sort of person naturally. The insurer works on the idea that you are a cautious, careful, responsible adult. So, if you aren’t, and you would not usually fix the roof or the path or lock your front door, and things go wrong, you won’t be able to claim.

Being Under-insured is like being Self-insured
If a building will cost $800,000 to rebuild and you insure it for $400,000, the insurance company says, that’s ok, we are all in this together.

They apply this with every item. Because you insured half its value, you are carrying the risk for the other half. So, if you claim $1,000, you will be paid half, which is $500, and you will pay the other half. If you have a fire that costs $100,000 to fix the roof and a couple of walls, they will pay $50,000.

Understanding your policy
Lawyers write policies with sentences that are too long for their own good. Understanding how your insurance policy works and what events are covered is smart.

An excellent place to start is the insurance council’s website https://understandinsurance.com.au/understand-your-insurance-policy