Whenever we take out an insurance policy, we are entering into a contract with the insurer. Whether household, motor vehicle, personal accident or any other type of policy, it is a legally binding contract between the insurer and the insured.



For householders, insurance of home building and contents is vital, not merely for peace of mind but to maintain the lifestyle they are accustomed to if the unthinkable should happen.

There are several aspects to consider when purchasing household insurance.

• The insured has a duty to disclose to the insurer anything that they know or could reasonably be expected to know is relevant to the insurer's decision to accept the risk and, if so, on what terms. For obvious reasons, this is called the Duty of Disclosure.

• Each party to the contract (i.e.: insured and insurer) has an obligation to each other in accordance with the clause of Utmost Good Faith.

Utmost good faith means that in every dealing between insured and insurer, all parties are obliged to act in a totally scrupulous manner – that is: in a spirit of Utmost Good Faith. This clause overrides all other clauses in the policy and is the measure by which the majority of insurance disputes are settled.

• The sum insured is a major consideration when taking out an insurance policy. It not only affects the cost of the premium but the insurer's liability if a claim is made. For home building and contents insurance, the sum insured is, arguably, the most crucial aspect and the importance of “getting it right” cannot be overstated.

According to The Insurance Council of Australia, approximately 43 per cent of home building and/or contents policyholders are significantly underinsured.

Determining the Sum Insured

For many people, determining exactly how much to insure their home building and contents for is a daunting task. It needn't be, however, with a few guidelines to follow.

Most insurance companies offer replacement cover for household policies – or “new for old” so it is important to insure the building and contents for their full replacement value, not their value after depreciation.

• Home building insurance: The sum insured is based on the total cost involved in rebuilding the property to its original or a comparative state. In addition to the actual building expenses, this includes the costs of demolition and removal of debris as well as any associated engineering, architectural and council requirements. Consultation with a professional builder or property valuer is recommended.

• Home Contents Insurance: The most effective way of determining the sum insured for contents insurance is to conduct a room-by-room inventory. Simply go into every room, listing the individual items in each. Next to each item, write down how much it would cost to buy that item brand new.

Most insurers provide literature, online information and calculators to assist with determining sums insured.

As previously stated, the sum insured determines the insurer's level of liability in the event of a claim. If the property is underinsured, the result can turn an already traumatic event into something more devastating.

Some insurance policies contain an “average clause” or “co-insurance clause.” What this means is that in the event of a claim, if a property is found to be significantly underinsured, the liability of the insurer will decrease commensurate with the level of underinsurance.

Let's look at a hypothetical example without the average clause:

A home is gutted as a result of bushfire. There is nothing retrievable. The homeowner had insured the building for $200,000.00 and the contents for $10,000.00. When assessors inspected the ruins and collected all the information about what was lost, it was determined that the actual replacement value of the building was $400,000.00 and for the contents, $20,000.00.

The insurer, however, was only obliged to pay a total amount of $210,000.00, less any excess, and did this. The insured could not rebuild for the amount of the claim payment and had to settle for a much more modest home, fewer household contents and a significantly reduced standard of living.

Let's look at another scenario with the average clause:

During a wild storm a tree falls onto a house, damaging the roof and part of the living room. Again, the building was insured for $200,000.00 and the contents for $10,000.00.

As in the previous example, loss assessors deemed the building's actual value to be $400,000.00 and that of the contents, $20,000.00. The cost to repair the living room and roof is $30,000.00 and is well within the sum insured. However, the insurer was only obliged to pay an amount commensurate with the level of underinsurance.

The underinsurance level of the building was 50 per cent and so the insurer paid 50 per cent of the repair cost – i.e.: $15,000.00. Contents to the value of $8000.00 were also destroyed during the incident, however, the insurance payment, under the average clause, will be just $4000.00.

In total, the insurer paid $19,000.00, less any excess, when repairs to the building and replacement of contents actually cost $38,000.00.

These two examples highlight the importance of placing the correct value on home building and contents insurance policies and how decreasing sums insured to save a few dollars in premium costs is really quite a gamble that could have disastrous effects.

It far better to know that should an unfortunate incident occur, we can recover what is lost.

After all, isn't that what insurance is all about?