Bushfire Underinsurance: Get it right before it's too late

Amidst ongoing catastrophic bushfires, those who have lost their home may find themselves unable to build due to underinsurance.   Adding to the grief are forecasts of higher-than-average temperatures and predicted longer bush fire seasons. Such extreme weather conditions will have consequences over time, with more people losing their homes to a catastrophic fire event.

The Insurance Council of Australia has warned that most households are underinsured; perhaps as high as 80% of all insured homeowners.

Underinsurance occurs when the amount a homeowner insures their property for does not cover the actual rebuilding cost, leaving the homeowner out of pocket for the extra costs of a rebuild to new building standards.

A new rating standard – known as the Bushfire Attack Level (BAL) – was developed after the 2003 Canberra bushfires and introduced in the wake of the 2009 ‘Black Saturday’ bushfire in Victoria.  The BAL aims to reduce the risks of a home igniting in a fire risk zone.

Only if your home is in an area prone to bushfires do you need to consider getting a BAL assessment.

The bushfire zoning of your property, proximity of the home to bushland, and the slope of the land are some of the factors that will determine the construction requirement for homes approved and built (or rebuilt) after 10 September 2009.  The higher a building site’s BAL, the more stringent the construction requirements which cover floors, external walls, doors and windows, roofs, verandas and attached carports.

If your home was built before 2009 and it burns down, it may – depending on its BAL – have to be rebuilt to a higher building standard than it was originally constructed.  These higher construction standards can significantly increase the cost of rebuilding your home in a bushfire prone area.  If you do not take account of the increase in rebuild costs – which can include the extra demand for builders and building materials after a bushfire disaster in calculating the replacement cost – you risk being underinsured.

Ensure bushfire underinsurance does not occur

In estimating your building costs, there are a range of free-independent insurance calculators that can be used to estimate the cost of rebuilding your home in accordance with national building construction standards.  For a more accurate estimate, a builder, architect or quantity surveyor could be engaged for this task.

Another reason for reviewing your insurance policy and checking whether you are underinsured is that a home lender, probably a bank, will want any existing mortgage to be paid out before a rebuild with the likelihood of a fresh mortgage needed for any rebuild.

You can upgrade your insurance cover by updating the sum insured of home and contents to reflect the likely replacement cost of rebuilding to current bushfire standards.  This option – often referred to as a sum insured safeguard – can increase the nominated sum insured by up to 25%.  Insurers are only obliged to cover you up to the amount you are insured for.  Payment of an additional premium for this safeguard will provide a buffer to ensure that you are fully covered.  Note that you may not be entitled to an automatic payment of this higher sum as the insurer is only required to pay the amount of your actual loss.

Commonly, an insurance policy for home and contents will instantly cover bushfires as an insured event:

  • immediately after another policy covering the same risk with the same level of cover ended, without any break in the period of cover; or
  • the same day you bought your home or moved to a new address.

Otherwise, your cover for loss or damage due to bushfires will start within the first 48 or 72 hours after you buy the property depending on the wording of your particular policy.  Any delay in the operation of a policy is designed to stop people taking out cover immediately before or during a bushfire emergency and then claiming for loss of damage due to a bushfire.

Sometimes insurers impose a “postcode embargo” on new policies for areas currently affected by bushfires.  The embargo can apply for several days and then be lifted which should permit a homeowner to obtain appropriate insurance cover.   A new policy issued during a period of high bushfire risk may include a no-claim period.  This would prevent a claim for the specific risk until the no-claim period has expired.

Bear in mind that we are seeing bushfires in more areas and bushfire warning levels being more frequently communicated, it is important that you make your own enquiries or talk to an insurance professional to ensure you understand exactly what your insurance covers.

When you first take out a policy and at every renewal, it is your obligation to review the amount of cover that the insurer is offering to ensure that it meets your needs and expectations.  If you are not satisfied with the amount of cover you are offered, this should be discussed with your insurer.  The aftermath of a catastrophic fire event should not be compounded by the trauma of underinsurance.  Local communities impacted by the onslaught of a bushfire are often so disrupted that families are forced to move elsewhere as the rebuild costs bear no resemblance to the sum insured on their homes.

Written by Bill McCarthy.