Tab 3 of 6 · Sum insured
Sum insured: the number that decides how far a claim goes
The sum insured is the set amount a home or contents policy will pay up to, and Moneysmart’s guidance is that for a house it should cover the full cost of rebuilding, not the price the property would sell for. When it falls short you are underinsured, and because of the averaging clause in most policies, a shortfall can reduce every claim, not only a total loss.
Rebuild cost, not market value
The price a home would sell for counts the land under it, while insurance only has to pay for putting the house back. Moneysmart warns that these two figures can sit far apart, and that the cost of rebuilding often climbs more quickly.
The rebuild figure is more than bricks and labour. Moneysmart lists the extra costs that are easy to miss:
- demolition and site clean-up;
- asbestos removal;
- council fees;
- architect and surveyor services;
- temporary accommodation;
- extras such as landscaping, rubbish removal and solar panels.
Where an older home may hold asbestos, the national Asbestos and Silica Safety and Eradication Agency says it is “not recommended that you handle or remove asbestos yourself”, and in some places the law goes further: in the Australian Capital Territory any removal needs a licensed removalist, unless it is part of minor routine maintenance or other minor work, and in Queensland a home owner must be trained before taking out more than 10 square metres of non-friable material, and only a removalist holding a Class A licence may remove friable material. The agency adds that a professional is the easier, safer and often cheaper choice. Waste from that work may only go to a landfill licensed to take it; putting it in a household rubbish bin can bring a fine. (Sources: the agency’s guidance for householders and home renovators; WorkSafe ACT on minor work.)
Temporary accommodation is usually paid on top of repair costs, with the benefit typically limited to a percentage of the sum insured or a set time period.
How averaging works
Most policies carry a coinsurance clause, also called averaging, which, in Moneysmart’s words, “applies whenever there is underinsurance below 80% – 90%”. It limits the insurer’s liability on a claim to the proportion of the replacement value that was insured, and it applies to every claim under the policy, not just a total loss. The threshold and method are in each policy’s own clause, so the PDS is where to check.
Worksheet A: Moneysmart’s example, 2 Smith St
The house costs $600,000 to rebuild and is insured for $400,000, so it is underinsured by a third, which Moneysmart rounds to 33%. Moneysmart then works each claim at the insured proportion.
- Garage repairs after a neighbour’s tree falls
- $15,000
- Insurer pays two-thirds
- $10,000
- Left to pay yourself
- $5,000
- Total loss: cost to rebuild
- $600,000
- Claim for the full sum insured
- $400,000
- Insurer pays 67% of $400,000
- $268,000
- Gap to the rebuild cost
- $332,000
Moneysmart’s $10,000 for the garage is exactly two-thirds of $15,000; its $268,000 for the total loss uses the rounded 67%. Worked at the exact proportion (400,000 ÷ 600,000), the total-loss payment would be $266,667, leaving a gap of $333,333. The gap figures are Dotto’s arithmetic.
Worksheet B: an example with made-up figures
This is Dotto’s illustration, applying the proportion Moneysmart describes. A real policy’s clause sets its own threshold and method, and an excess may also apply.
- Cost to rebuild (including the extras above)
- $700,000
- Sum insured
- $490,000
- Proportion insured (490,000 ÷ 700,000)
- 70%
- Storm damage to the roof
- $30,000
- Insurer pays 70% of $30,000
- $21,000
- Left to pay yourself, before any excess
- $9,000
With a sum insured of the full $700,000 in this example, no proportion would apply and the $30,000 repair would be paid in full, less any excess.
How a sum insured drifts out of date
Moneysmart names the common causes: not reviewing cover regularly; guessing a number that sounds right; using market value instead of rebuild cost; not updating after renovations (a new kitchen, deck or extension); rising building costs and inflation; and missing the additional rebuilding costs. If cover has not been reviewed for 12 months or more, it says, it is easy to become underinsured.
The consequences it lists are blunt: paying the gap yourself, a smaller payout on every claim, rebuilding smaller or with cheaper materials, and waiting longer to recover.
Estimating it
Four ways to reach a figure
A calculator that asks a lot
Moneysmart suggests a home insurance calculator, and says one that asks for detail (whether the house is on a slope, how old it is) is more helpful. It points to the Insurance Council of Australia’s building and contents calculators.
The insurer’s own calculator
Insurers that have adopted the General Insurance Code of Practice commit, when you apply for or renew home building insurance (but not strata insurance), to give access to a calculator that is periodically reviewed and updated to estimate the sum insured.
A professional, for an unusual house
For an unusual house, Moneysmart says builders, quantity surveyors or valuers can give current rebuild costs, including materials and labour.
A list and a video, for contents
For contents, list belongings with what each would cost to replace at today’s prices, with serial numbers, receipts and photos where you have them. Moneysmart also suggests a video of each room, as a record for a future claim.
Contents has two more traps
Item limits. Most contents policies cap what can be claimed for certain items. Moneysmart’s example: with a $1,000 limit on electrical appliances, a $2,000 television destroyed by fire leaves you paying the difference to replace it.
Replacement value or value. Most contents insurance pays replacement value (“new for old”), the full cost of new items. Some policies pay what the items were worth at the time, which is likely to go down each year; a fridge valued at $500 brings $500, even if a similar new one costs more.
At each renewal
For policies that renew automatically, Code insurers commit at purchase and at each renewal to remind you that you can opt out and to tell you to check that the sum insured is still appropriate. Moneysmart’s renewal checklist begins in the same place: is the sum insured still enough, does it reflect inflation, and does it reflect changes to the property?