Are you an SME owner who works from home? Would the loss of your home also impact your business? Unfortunately, many homeowners are underinsured, which means that claim settlements and repairs can be delayed. Also, many home insurers don’t automatically cover business equipment, and you will have to ask your insurer to add the additional cover. So, being insufficiently or underinsured could significantly impact you personally and your business and clients.
Underinsurance is more common than you may think in Australia. Up to 23% of people have no home or contents insurance, and of those, 80% have an inadequate cover. So let’s take a look at what it is and why it happens, its consequences and how you can protect both your home and business from the financial and reputational exposures of underinsurance.
What is Underinsurance?
First of all, before you can know if you’re underinsured, you have to understand what underinsurance means.
If your insurance policy doesn’t cover the current cost of rebuilding or replacing the contents with new items, then you're underinsured. As mentioned, this is a very common problem in Australia, and it’s been an ongoing issue. For example, a report prepared for the Insurance Council of Australia (ICA) in 2013 stated that 83% of homeowners and renters were underinsured for their property and contents.
In 2021, another ICA report found that 23% of Australian households do not have building or home contents insurance, with many others actually insured.
In recent years, we have experienced bushfires, floods and rapidly rising rebuilding costs, up 8% in the past year alone. This is due to the housing renovation boom and increasing materials costs due to Covid-related supply chain delays. Underinsurance has always been a risk. Combined with the lack of insurance for home-based business equipment, it can result in even larger financial risks for many SME business owners.
Why are People Underinsured?
There are many reasons why homeowners are underinsured. Some people don’t have enough home insurance simply because they underestimated the rebuild costs and subsequently have not reviewed the insurance cover. There are lots of free online calculators available that can help.
Other issues include not including recent renovations, extensions or additions. Some people are also underinsured to reduce their premiums, a financial gamble with often the persons largest asset.
In general, most homeowners tend to underinsure their homes due to a lack of information about the current costs of rebuilding and replacing their homes.
What are the Consequences of Underinsurance for SME Owners?
The biggest issue with underinsurance is when your policy’s coverage level is less than the value of your claim. Your insurer will then only pay part of your claim, leaving you out of pocket and having to find the balance. This will delay the rebuilding or repair of your home at often the worst time, also impacting your business.
How Can You Avoid Underinsurance?
The best way to avoid underinsurance is to choose a reputable insurance adviser to discuss your personal situation and goals. They can also arrange to have your home professionally valued and ensure that the sums insured are calculated correctly.
The sums insured should be based on the cost of rebuilding your property and not on the purchase price or market value. You also need to consider the location of your property. Is it outside the main town? Is it on a block difficult to access? Also, the cost of demolition, whether it has asbestos and any architect and government fees.
All of this means that avoiding underinsurance and having the correct insurance is the best way to keep your personal and business life on track. In the event of substantial damage to your home, you want to be in a position to have repairs or rebuilding authorised quickly while looking after your clients.
To ensure that your sums are insured and the cover is appropriate and sufficient for your needs, talk to one of the advisers at Insurance Advisernet. Visit our website or contact us for more information on underinsurance and insurance advice.
This communication including any weblinks or attachments is for information purposes only. It is not a recommendation or opinion, your personal or individual objectives, financial situation or needs have not been taken into account. This communication is not intended to constitute personal advice.
We strongly recommend that you consider the suitability of this information, in respect of your own personal objectives, financial situation and needs before acting on it. This document is also not a Product Disclosure Statement (PDS) or a policy wording, nor is it a summary of a particular product’s features or terms of any insurance product. If you are interested in discussing this information or acquiring an insurance product, you should contact your insurance adviser to obtain and carefully consider any relevant PDS or policy wording before deciding whether to purchase any insurance product.