Setting a sum insured that keeps up with a builder quote

Underinsurance is the most common and most expensive mistake in Australian home cover, and it is almost never a decision anybody made. It is a number that was correct once, indexed by a small percentage each year, while the actual cost of rebuilding moved by a lot more.

You find out at the worst possible moment. Here is how to check yours, and the three numbers people leave out.

Sum insured is not market value

Start here, because it trips up a surprising number of people. Your building sum insured is the cost to rebuild the structure on your land. It has nothing to do with what the property would sell for, because a buyer is largely paying for the land, which cannot burn down.

In an inner suburb, the rebuild cost can be a third of the sale price. On a rural block, the rebuild cost can exceed it. Either way, insuring for the sale price is wrong in both directions.

The three numbers people leave out

1. Demolition and debris removal. Before anybody builds anything, the remains have to come out, and after a fire that includes hazardous material handling. Typically 5 to 10 per cent of the rebuild cost, and higher on a difficult access site.
2. Building back to the current code. You do not get to rebuild the house you had. You have to rebuild to today's National Construction Code, today's energy efficiency requirements, and today's bushfire construction standard for your BAL band. On a 1970s house in a BAL-29 area that difference is enormous, and it is the single most underestimated item.
3. Professional fees. Architect or building designer, engineer, certifier, energy assessor, bushfire consultant, surveyor. Usually 8 to 12 per cent on top of the build.

A sum insured that covers the build but not those three is short by something like a quarter, before anybody has argued about anything.

The other things inside the fence

Building cover is not just the house. Check that your figure includes:

• Fencing, retaining walls and the driveway.
• The shed, the carport and the garage if it is not attached.
• The in-ground pool, its fence, its pump and its filtration.
• Solar panels, the inverter and any battery.
• Water tanks, pumps and the septic system.
• Built-in wardrobes, the kitchen, and fixed floor coverings.

Fencing after a bushfire is routinely the item that surprises people most, because a rural boundary is measured in kilometres and fencing is quoted per metre.

Checking it in about ten minutes

Take your floor area in square metres. Multiply by a regional rate per square metre for your construction type, which any local builder will give you over the phone and which most state master builders associations publish. Add the outbuildings, the pool and the fencing at their own rates. Add 10 per cent for demolition, 10 per cent for code uplift, and 10 per cent for professional fees.

If the result is more than 15 per cent above your current building sum insured, ring your insurer this week rather than at renewal.

Calculators run by insurers, including ours, do this same arithmetic with better regional rates. Use one, but treat it as a floor rather than an answer, particularly if your house has anything unusual about it: a difficult site, a heritage overlay, hand-made joinery, or a roof form that cannot be built by two blokes and a nail gun.

Contents, which people get wrong the other way

People overinsure contents almost as often as they underinsure buildings, because they value them at what they paid rather than what replacement costs. Then they discover the sub-limits.

The sub-limits are where contents claims actually go wrong. A policy with a $95,000 contents sum insured will still cap unspecified jewellery at a per-item figure, and cap the total for collectables, and cap money in the home. If you own one thing worth more than that per-item limit, listing it specifically costs a few dollars and is the difference between a claim and a disappointment.

The practical method: walk each room with your phone, filming, narrating, opening cupboards. Twenty minutes. Email it to yourself so there is a dated copy that is not in the house.

What we do about it

Wattle recalculates your building sum insured at every renewal against regional builder pricing, and we show it to you as a figure you can accept or change, rather than applying it silently and hoping you do not notice the premium.

If you accept our review figure and a total loss still comes in short, we add up to 25 per cent as a safety net. That is a real backstop, not a substitute for getting the number right, and it is conditional on having accepted the review at the last renewal, which is stated plainly in the PDS.

None of this is complicated. It is just the sort of thing nobody does until a bad summer makes them, and it is much cheaper to do in March. Start with the home and contents page, or get a price with the duty already in it.