In light of the recent tragic floods, many people, including myself, have looked at their insurance policy to see what they are covered for.
I can’t comment on what defines a “flood” or not…but I can give advice on what investors or homeowners should consider when taking out home insurance.
The Australian Securities and Investments Commission (ASIC) estimate that between 7.5% and 59% of owners they surveyed were insured for 70% or less of the cost of re-building their property.
Working out what it costs to rebuild your home is complex and requires technical knowledge. Unfortunately in Australia, the onus of estimating this cost is on the consumer. The tools supplied by insurers – such as web calculators – vary in their methods and accuracy.
Working out the cost per square metre of the property is often the easiest but not necessarily the most accurate method.
In fact, ASIC recommends using an elemental estimating method, which involves “assessing in detail different elements of the building (including individual features of the home) to price rebuilding costs ‘from the ground up’, using local wage and material rates and other construction data.”
Another common mistake homeowners make is subtracting the value of the land from what you would get if you sold your home today. For instance, if you purchased a property for $400,000 and the rates notice says the land if worth $250,000, the rebuild is likely to be more than $150,000.
Some other issues to consider when taking out home insurance are:
1. You need to allow for demolition of the existing structure, and depending upon the type of property, you may even need to allow for expensive removal of Asbestos.
2. You need to allow for the re-design of a new property. This may or may not include an external project manager to oversee the construction of the property. Design can vary greatly from one project to another depending upon the quantum of work involved. For instance, a project home will have far less of a design component in comparison to a luxury waterfront property house on a sloping site. This would require extensive engineering detail for example.
3. You need to allow for escalation (inflation) of the construction cost. For instance, it may take 6 months from the time the building was demolished until the time property is completed. Most cost guides forecast construction costs. The Australian Institute of Quantity Surveyors predicts a relatively flat increase of construction costs in Sydney of approximately 3%. All states vary, which leads me on to the next points:
4. You need to take into account locality and ease of access for materials. If you are building in a remote location the transportation of material can be costly. Worse still, if you are building on an island you may have to bring the materials to the site by boat or barge!
5. You may also need to bring a new property in line with current fire code or energy efficiency standards. For instance, in Victoria, all new homes built have to meet 5-star energy efficiency standards and going forward all homes will need to meet a 6-star rating.
To quote ASIC – “Even if you think you have enough insurance, you should check your level of cover, particularly if you haven’t increased it for a number of years.”
If you’ve completed renovations, you should also increase the cover of your home to reflect the added value and costs that would be incurred in a rebuild.
Some people are hesitant to increase their cover at the risk of increasing their premium. If this is the case, shop around. There’s strong competition in the insurance industry and you might find you can increase the cover for the same price at least.
Look for a policy that asks lots of detailed questions about the type of property you own, and the unique features that may affect the cost a rebuild.
If in doubt, seek out the advice of a professional – such as a quantity surveyor. Or if feasible, contact the architect or builders involved in the original build.
Article by Tyron Hyde, Director of Washington Brown Quantity Surveying