The problems faced by a number of clients recently has prompted Coolamon solicitor, Bill Thompson, to raise his concerns about insurances policies on houses and their contents.
Many people may think they are covered and could be disappointed.
"A number of our country clients have recently suffered fire damage to their houses and when they have lodged an insurance claim, they have received a lesser amount than the sum insured, " he said.
It is crucial people ensure they have adequate insurance coverage".
The three major reasons why people did not get full coverage under their insurance policies were:
- The difference between a replacement (or reinstatement) policy and an indemnity policy.
- Under insurance (co-insurance clause).
- Not checking the terms and conditions of the policy, especially in relation to risks such as flooding.
Our firm had recently been consulted by a number of clients who had older type houses destroyed by fire and when they lodged a claim they had received a lesser amount than the insured value, because the policy was an indemnity policy.
The basic difference between a replacement (or reinstatement) policy and an indemnity policy is that under an indemnity policy the insurance company depreciates the value of the replacement building or item depending upon its age.
Under an indemnity policy it was common practice to depreciate the replacement value by one per cent for each year the house has been erected.
"For example, if your house was insured for $100,000 under an indemnity policy and the cost of replacing the house is $100,000 then the indemnity policy provides that the insurance company can depreciate the value of the house by multiply the age of the house by one per cent." he said.
"If the house was 64 years old, then the amount payable under the policy would be the replacement value of $100,000, less depreciation of 64 years multiplied by one per cent, or a final amount of $36,000 after depreciation".
"This example highlights the need for people to check whether they have a replacement or indemnity policy".
"Any person with an indemnity policy should give consideration to changing their policy to a replacement policy."
"A replacement policy is important for older houses such as farm houses."
"Farmers and people in rural country towns often are the owners of houses more than 60 years old, which are serviceable, but if destroyed could not be replaced under an indemnity policy, for example."
It was important for people to check with their insurance policy, agent or broker whether they had a replacement or indemnity policy.
People insuring the house should REGULARLY CHECK THE REPLACEMENT COSTS OF BUILDING A HOME.
The following matters should be considered:
Calculate the cost per square of the house. For example if the house is 12 squares, then the current replacement cost would be around $10,000 per square.
When calculating the replacement costs fixtures such as carpets, light fittings, hot water services, fences and driveways should be taken into consideration.
Another major reason why people do not receive the full cover of their destroyed house was because they had under-insured it, and a co-insurance clause applies.
This happened when the replacement cost exceeded the sum insured.
"A typical co-insurance clause provides that if you undervalue your property by more than 20 per cent, the insurance company will pay a proportionally lower sum for any claim," Mr Thompson said.
"For example, if the replacement cost of a house is $90,000 and it is insured for only $60,000 and if half of the house is destroyed in a fire and will cost $45,000 to replace, the owner will only receive $37,500, even though the insurance coverage is $60,000."
Mr Thompson said generally insurance policies would not cover damage caused by war, nuclear explosion, flood and the necessary application of heat such as using a blowtorch.
"Choice magazine in an article dated August 1989 concludes "the most significant of these for most people is flood. Most companies cover for water damage from leaking or broken pipes, or if a storm makes a hole in the roof and lets the rain in, but policy wording generally excludes flood damage that is the result of rising waters."
"Cover for flood damage is sometimes available at extra cost, but in flood prone areas it may be too expensive or simply unavailable."
Mr Thompson said home owners with a house located in an area that is subject to potential problems such as flooding or fire, should check the terms and conditions of the policy with their insurance agent or broker.
"Most house and contents policies cover you for legal liability (public liability)." he said.
"This means the policy covers you for any claims made by a persons for damage to their property or person that arise as a result of the house or contents.