" 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?
