What is underinsurance?

Underinsurance is when you insure your assets for a Sum Insured less than it would cost to replace them.

What do the Sums Insured on my Farm Pack represent?

To understand whether you are underinsured or not you need to understand what makes up your Sums Insured for each section. For example, did you know that the Sum Insured for your Home Property under the Farm Pack includes items such as paved driveways, gates, swimming pools, solar panels, water tanks, gazebos etc., not just the house?

In respect of the Farm Pack, were you aware that coverage for unspecified Buildings, Contents, Machinery, Plant & Equipment etc. may all subject to maximum values any one item and some may have restricted cover?

In respect of blanket coverage for machinery breakdown, did you know you must declare the total number of property insured items, present at the situation?

Why are many people exposed to underinsurance?

There are many reasons why people might be exposed to underinsurance but here are main reasons that we see:

1. Cost. Insureds are trying to keep the cost of insurance premiums down.
2. “It will never happen to me, I’ve never had a claim”. Unfortunately fire and storm does not discriminate.
3. “If something happens it will only affect part of the building / fencing”. Typically yes, but it’s good to be prepared for the everyday mishap but what happens when something unexpected and catastrophic happens, like a bushfire?

What are the main implications of underinsurance?

1. Underinsurance of fencing has been the biggest issue in this year’s bushfire claims. If a tree comes down on a section of fencing in a storm the $50,000 first loss limit you took might be fine. But what if a fire comes through the property and burns through all 5kms of fencing?

There have been high quote costs for replacement by contractors seen following the recent bushfires. The following quotes have been provided in the following States:

• Victoria $14,500 per km
• South Australia $22,000 per km
• NSW $18,000 per km

(Source: Allianz Australia Insurance Ltd., February 2020)

1. Reducing sums insured of the buildings also reduces the value you are able to claim for removal of debris. There will be a benefit provided within your wording which is a percentage proportion of the sum insured of the building that is the subject of the claim. Therefore if you reduce the sum insured of the building you reduce the limit accessible to you for removal of debris.

You can take out additional cover for additional Removal of Debris, however you must note that this may not respond if the building is underinsured.

The average claim for removal of debris for any one building following the recent bushfire disaster was $30,000.

1. Can you continue running your Farm Business without your buildings, equipment, machinery etc.? If you have only insured enough to replace 50% of the items, can you survive without the other 50%? How long will this put you out of Business for?
2. Your insurance policy might include an underinsurance clause which can also be referred to as a coinsurance or average clause.

What this means is if your property is insured for an amount less than the full cost of rebuilding it, in the event that you need to make an insurance claim you may receive less than the full value of the claim. So, if your insurance policy has such a clause this may allow insurers to reduce their liability for the damage in proportion to the amount of under insurance.

For example, if storm damage to your building costs $10,000 to repair and your house is insured for $150,000, but the full rebuild cost is $200,000, the following will apply:

$150,000/$200,000 = 75%

$10,000 x 75% = $7,500.

This means that as your building is only insured for 75% of its full rebuild cost insurers will only pay 75% of the agreed cost of the damage if average applies.

You should check your policy wording to see if this clause applies.

1. If you do not declare all eligible items under a blanket machinery breakdown policy, underinsurance may apply.

What this means is if you declare 4 pumps (machine items) at your location, and at the time of a claim there are 8 pumps which are eligible to be claimed under the blanket cover, the amount payable will be reduced in proportion to the number of machine items declared,. i.e only 50% of the claim will be paid.

How can I avoid underinsurance?

1. Remember to insure the items you can’t see, as well as the ones standing in front of you that you use every day. The common items that many people don’t think about include, but are not limited to, power poles, irrigation and/or drainage systems, power lines, pumps, driveways, telephone lines, electrical cables, water tanks, feed silos etc.
2. If the cost of insurance is concerning you then speak with your broker to see whether increasing your excesses is an option. Savings in premium can be made if you are willing to take a larger excess in many cases.
3. Take into account extra costs. You will need to factor in demolition, removal of debris and compliance with modern building codes.
4. Get a valuation done. We can assist in arranging for an independent replacement cost valuation to be conducted. That way, even if you choose not to insure the full replacement cost of your assets, at least you will be aware of the underinsurance you might be exposing yourself to and can make an informed decision. Replacement cost valuations should be done every 3 years or so to ensure the values are up to date.
5. Keep a running asset schedule so you know what you have in your possession at all times. Make sure that you update your broker immediately when you need to add, delete or amend any items on the schedule.

Gow-Gates specialises in this type of risk placement, so if you believe that this issue is relevant to your business, please feel free to contact Gow-Gates Insurance Brokers on (02) 8267 9999 to discuss your circumstances or to obtain a quotation.

Gow-Gates Insurance Brokers advises that persons should not act on the material contained in this article as the items are of a general nature only and may be misinterpreted. We therefore recommend that advice be sought before acting in these areas.