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A crisis of underinsurance threatens to scar rural Australia

Chloe Lucas, University of Tasmania; Christine Eriksen, University of Wollongong, and David Bowman, University of Tasmania

Australia is in the midst of a bushfire crisis that will affect local communities for years, if not permanently, due to a national crisis of underinsurance.

Already more than 1,500 homes have been destroyed – with months still to go in the bushfire season. Compare this to 2009, when Victoria’s “Black Saturday” fires claimed more than 2,000 homes in February, or 1983, when the “Ash Wednesday” fires destroyed about 2,400 homes in Victoria and South Australia, also in February.

The 2020 fire season could end up surpassing these tragedies, despite the lessons learned and improvements in preparedness.

One lesson not really learned, though, is that home insurance is rarely sufficient to enable recovery. The evidence is many people losing their homes will find themselves unable to rebuild, due to lack of insurance.

We know this from interviews with those affected by the October 2013 Blue Mountains bushfires (in which almost 200 homes were destroyed). Despite past disasters, more than 65% of households affected were underinsured.

Research published by the Victorian government in 2017, meanwhile, estimated just 46% of Victorian households have enough insurance to recover from a disaster, with 28% underinsured and 26% having no insurance.

The consequences aren’t just personal. They potentially harm local communities permanently, as those unable to rebuild move away. Communities lose the vital knowledge and social networks that make them resilient to disaster.

Miscalculating rebuilding costs

All too often the disaster of having your home and possessions razed by fire is followed by the disaster of realising by how much you are underinsured.

As researchers into the impact of fires, we are interested why people find themselves underinsured. Our research, which includes interviewing those who have have lost their homes, shows it is complicated, and not necessarily due to negligence.

For example, a woman who lost her home in Kinglake, northeast of Melbourne, in the 2009 fires, told us how her insurance calculations turned out to bear no resemblance to the actual cost of rebuilding.

“You think okay, this is what I paid for the property,” she said. “I think we had about $550,000 on the house, and the contents was maybe $120,000.” It was on these estimates that she and her partner took out insurance. She told us:

"You think sure, yeah, I can rebuild my life with that much money. But nowhere near. Not even close. We wound up with a $700,000 mortgage at the end of rebuilding."

An extra mortgage

A common issue is that people insure based on their home’s market value. But rebuilding is often more expensive.

For one thing there’s the need to comply with new building codes, which have been improved to ensure buildings take into account their potential exposure to bushfire. This is likely to increase costs by 20% or more, but is rarely made clear to insurance customers.

Construction costs also often spike following disasters, due to extra demand for building services and materials.

A further contributing factor is that banks can claim insurance payments to pay off mortgages, meaning the only way to rebuild is by taking out another mortgage.

“People who owned houses, any money that was owing, everything was taken back to the bank before they could do anything else,” said a former shop owner from Whittlesea, (about 30km west of Kinglake and also severely hit by the 2009 fires).

This meant, once banks were paid, people had nothing left to restart.

She told us:

"People came into the shop and cried on my shoulder, and I cried with them. I helped them all I could there. That’s probably why we lost the business, because how can you ask people to pay when they’ve got nothing?"

Undermining social cohesion

In rural areas there is often a shortage of rental properties. Insurance companies generally only cover rent for 12 months, which is not enough time to rebuild. For families forced to relocate, moving back can feel disruptive to their recovery.

Underinsurance significantly increases the chances those who lose their homes will move away and never return – hampering social recovery and resilience. Residents that cannot afford to rebuild will sell their property, with “tree changers” the most likely buyers.

Communities not only lose residents with local knowledge and important skills but also social cohesion. Research in both Australia and the United States suggested this can leave those communities less prepared for future disasters.

This is because a sense of community is vital to individuals’ willingness and ability to prepare for and act in a threat situation. A confidence that others will weigh in to help in turn increases people’s confidence and ability to prepare and act.

In Whittlesea, for example, residents reported a change in their sense of community cohesion after the Black Saturday fires. “The newer people coming in,” one interviewee told us, “aren’t invested like the older people are in the community.”

Australia is one of the few wealthy countries that heavily relies on insurance markets for recovery from disasters. But the evidence suggests this is an increasingly fraught strategy, particularly when rural communities also have to cope with the reality of more intense and frequent extreme weather events.

If communities are to recover from bushfires, the nation cannot put its trust in individual insurance policies. What’s required is national policy reform to ensure effective disaster preparedness and recovery for all.The Conversation

The Conversation


Chloe Lucas, Postdoctoral Research Fellow, Geography and Spatial Sciences, University of Tasmania; Christine Eriksen, Senior Lecturer in Geography and Sustainable Communities, University of Wollongong, and David Bowman, Professor of Pyrogeography and Fire Science, University of Tasmania

This article is republished from The Conversation under a Creative Commons license. 


Stephen Coldwell
December 21, 2020

The real elephant in the room is the sneaky tricks the insurance companies pull to avoid paying for the the draconian demands of the building regulators. Every year for 30 years we asked our insurer if we were covered for the increase in both building costs and standards, then followed their recommendations to increase our cover. The house is covered for $400,000. Recently our roof was wrecked by falling trees. The repair quotes were about $200,000 to repair the roof, (which sounds obscenely inflated) plus another $200,000 to bring the undamaged part of the house up to the new standards. The insurance policy includes an allowance of about 10% to comply with the new standards FOR THE DAMAGED PART of the house, but explicitly EXCLUDES paying to upgrade the undamaged part. At the time of renewal, neither the underwriter nor the broker drew our attention to this, nor offered an option to pay more for full cover. Now they claim it's impossible then contradict themselves by blaming us for underinsuring. Meanwhile, the local councils and building authority reserve the right to demand these upgrades through what is effectively retrospective regulation. So what they are doing is taking advantage of the suffering of victims of disaster to feed their inflated idea of their own importance, to fine people for having homes older than about five years. (To cop this penalty any other way I would have to be a celebrity chef who underpays their staff by millions). Then, both the regulators and insurers glibly try to blame the victim by claiming they were "underinsured", when they offer no option. If this was widely known, their would be a revolt, but they both quietly bully homeowners one-at-a-time when they are least able to resist.

January 11, 2020

Thank you for the article and for the detail in the replies by John and Wayne. My insurance is up for renewal and it’s given me the tools to have a more productive conversation with the insurance company. My issue is that I only want to insure against real catastrophe and take out a policy with a large excess like $20-$30K to make the premiums more affordable. But unless I haven’t been looking hard enough none of the companies I’ve talked to allowed the client to set their preferred excess.

January 09, 2020

Correct me if I'm wrong, but apparently another misunderstanding with under insurance is what happens if you don't get a total loss. Say your property is actually worth $500,000 and you insure only 50% of your property value ie $250,000. if you get a total wipe out you would get the full $250,000. but if you only lost half of the house value you would only get paid $125,000. most people would assume they would get the full $250,000 back. Is this the correct interpretation?

Allan Manning
January 13, 2020

Under most home and contents insurance policies, they are what the insurance industry refer to as first loss policies. That means in the case you describe the home owner would get the full sum insured.
With most business insurance however there are penalties for being under insured and you only get a proportion of the loss paid. It is not prorata with most insurers allowing a 20% tolerant for being under insured.
I stress this is a generalisation with insurance policies being vastly different.

January 08, 2020

As someone who was flooded in the North QLD floods last February, I can tell you that most people have no idea when it comes to home insurance. People often think their insurance covers them for things which it wont, and often things in a PDS are open to interpretation (and if so the insurer will argue not to replace.... obviously a fire is pretty absolute though, but I wouldn't put it past an insurer to try it on!).

In terms of the level of cover, I agree, many people are woefully under insured. There are probably a number of reasons - cost of premiums, ignorance, unwilling to do the ground work and quantify potential costs, an expectation that the insures will do the 'right thing', and of course the 'it'll never happen to me' attitude etc.
I'm in finance so I had spent some time calculating sums insured and usually reassess when the renewal comes in the mail - never expecting to claim of course. But unfortunately this was tested in 2019.

I gave the assessor 12 A4 pages of contents and showed him hundreds of photos - contents was assessed as a total loss. I discovered that I was about $3,000 short on that calculation. Funnily enough, the carpet was worth about that much which I hadn't included in my contents sum insured. As for the house, it was completely stripped and re-built. So I'm confident that my sum insured could cover a full demo and rebuild.

My tips:
- Do your homework and don't fluff the numbers. Better to be a bit over than under insured.
- Don't forget to include the little things. It all adds up. Trust me!
- Make sure you are adequately insured for things like carpet, blinds/curtains and other items that you may think are building, but are in fact contents. I heard one story of $20k worth of blinds being destroyed 2 weeks after being installed. Their contents sum insured was $40k. Ouch!
- Check how much rent your insurer will cover. No good having 10% of sum insured if the PDS says that its for a maximum of 12 months. That really wont do for something like a fire where it is an absolute loss. You'll be paying a mortgage and rent. Also, check if 'short term accommodation' is part of that 12 months or not.
- Removal cover. If you have some stuff left, you'll be needing this at least twice. We moved 3 times in 11 months.
- Other things to check: Does your cover include things like landscaping, pools, sheds, decks. Some cover them, some don't. If yours does cover these then what are the nitty gritty details? Plenty of stories up here of insurers trying to get out of works on pools and decks etc.
- Read your PDS! and read it again.

As mentioned, we are back home in just under a year but I had to ride everyone all year - insurers, assessors, engineers, builders, trades, electricity and phone companies.... the list goes on. It was bloody exhausting. But I will say that I'm glad I took a settlement and hired my own people to rebuild.
The insurers panel builders came in and scooped up so much work that many people wont move back in until mid this year. So, if you are unfortunate enough to go though this, don't let them scare you away from taking a settlement, if you feel this would suit you better. Just make sure you negotiate an adequate figure. All the insurer wants is to control and cut costs, and the panel builders just want to rack up numbers. They'll say anything to scare you away from a settlement - I was fed some ludicrous reasons not to.

January 08, 2020

To check if I was underinsured or not I just used a web calculator to see what an insurance company thought how much I would need to rebuild my house. It was built about two years ago for a cost at the time of about $280,000. According to the calculator it would cost $640,000 to rebuild it, I recall using a different calculator previously which gave me an even higher number. I'm sure there has been some price rise and inflation in building costs in those two years, but it strikes me as being unlikely that it's 130%. In fact there is a reasonable chance that with $640,000 I could either buy another block of land and build the same house on it, or buy an equivalent existing house for the same amount. So am I underinsured?

John Wilson
January 10, 2020

House Insured Value
My house and contents insurance is up for renewal in February, so in mid-December I started to guesstimate what I ought to insure for, using a “calculator” on my insurer’s website. I was very troubled by what I found.
Insurer Approach
Their approach is very simple: it takes account of building material (double brick or brick veneer), building quality (either medium or high) and building area. That produces a number, which does not include architect’s and other fees or demolition (these can total around 13% of the base building costs including GST). There is no check on land slope or location, which can materially impact costs. It does not state whether GST is included. They do caution that dollar costs need to be added for fencing, pool and outbuildings.
Having worked through their numbers, my current cover appears to be well above their calculated number. But….
Independent Calculator
Being a retired engineer with nothing to do now that the cricket has finished, and never trusting single numbers, I decided to make a check independent of my insurer. My place is a bit different from “average”: 3m ceilings; it’s a biggish block, so lots of fencing and paving; solar panels; reverse-cycle air conditioning; stable and gazebo etc.
I used Cordell’s calculator for this. It requires the property’s postcode, what building style (including categories such as post-war (1945-1959), contemporary (1960-present), plus others), building material (double brick, brick veneer etc), land slope, closeness to bush, area, ceiling height, number and size of bathrooms/kitchens/laundries/carports/verandahs/sheds/swimming pools/fencing/paving etc, type of air conditioning, solar panels etc etc. It provides figures for building cost, fees, demolition and GST.
I compared my insurer’s and Cordell’s results on just the building cost excluding fees and demolition but assuming my insurer had provided for GST. The difference was huge: Cordells’ was 90% higher, but that was unfair because I had loaded in the extras for Cordell. So, I pruned out all the extras, including air conditioning, solar panels, shed, extensive fencing and paving etc to give a ”base”. This was still way above my insurer’s, as shown by the table below for a 215 sq. metre house in Adelaide:
Building Cost ($k/m2) incl GST
Building Material Insurer bldg quality Insurer Value Cordell "average" Cordell “quality” Cordell "prestige"
Double brick Medium 1.40 2.36 2.78 3.4
High 2.00
Brick veneer Medium 1.35 2.19 2.50 3.05
High 1.95

This throws up a number of comments and questions:
• Cordell is still around 70% above my insurer.

• What do the stated building qualities mean? I suggest that the perception of quality is in the eyes of the owner: someone who is very proud of their house which he thinks is better than his neighbours or friends might think his house is really good or prestige quality, whereas someone else might regard the same house as pretty average – what would be expected of him. The table above suggests this self-assessment could result in about 43% difference between the highest and lowest category for my insurer and for Cordell’s. Not immaterial!

• I suspect my insurer does not build in the value of features such as air conditioning, solar panels, rain water tanks etc – which are pretty normal in Adelaide for detached houses. If not, using their number might make the house under-insured.

• The difference between double brick and brick veneer is peanuts – only 4 to 11%

• These costs are for a complete rebuild. Note that partial repairs are always more expensive as builders don’t know what problems may arise.

In addition to the results above, I did a lot of other checks. For instance, I checked what would be the insurance value if the area was smaller. One would expect that there would be some economies of scale in a bigger property (the usual engineer’s rule of thumb is the “0.6 power rule”- doubling the area would increase the cost by only 52%, or halving it would reduce cost by 34%).
However, my insurer’s calculator simply pro-rated costs to area: doubling area doubled costs, halving area halved costs.
Cordell quite closely followed the rule: doubling area increased costs by 47%, halving area lowered costs by 32%. The slight discrepancy was probably caused by my choice of fixed sizes for expensive rooms such as bathrooms, kitchen and laundry.
What’s Correct?
I don’t know. I am planning a discussion with my insurer.

• Make sure you allow for all the features of your property: air conditioning, solar panels, closeness to bush and creeks, land slope, location, sheds and other improvements.
• Your historical costs will probably be too low.
• Use a calculator which allows specific features to be included.
• Check what your insurer includes as the sum insured- do they expect it to include fees, demolition and GST?
• Check what your insurer does if they see extra features such as outbuildings and a pool on the site which are undamaged. Do they pro-rate the sum insured to their assessment of the total value including those extras, and pay out that reduced amount?”
• What does your insurer do if you are over-insured?
• Models to calculate insured sums should be reviewed and standardised. The government is mulling a royal commission into bush fires. It’s debateable whether this issue of determining the sum insured should be considered there, or elsewhere such as by the Productivity Commission or the ACCC. It is complete rubbish to have this important part of people’s welfare open to greatly differing and inadequate “calculators” for which insurers deny any responsibility – there ought to be a single, verified, authorised process.
• Be prepared for the post apocalypse discussion with your insurer: take photographs of the building and contents, and store those in a secure location.

January 08, 2020

Many Insurance Companies offer Replacement Policies, so the area of Under Insurance should most likely lie with Contents Covers.

January 08, 2020

Would really like to see an itemized list of the costs for this person. How did rebuilding a house cost $1.37 Million dollars?

Our Bank set the insured amount and said they would not give us a loan without insurance of over $800,000. But is this enough? Is this too much? Who knows?

To be honest I could not find any help online on how to correctly value a rebuild of your home and contents. Maybe some time would be better spent researching a guide rather than spreading fear. Although cost of renting was a good one, I had not thought of that. One to add to the list....just need a full list....

January 08, 2020

Russell, the article does not indicate the size of the mortgage before the fire. If it was say $550,000 then the bank would take all the $550k house insurance payout. The homeowner then spends $700,000 on a new house and that’s the size of their new mortgage. It’s only $1.37m (which includes $120k contents) if they had $0 mortgage before the fire.

jim walton
January 08, 2020

Surely the insurance company has a responsibility to ensure the insurance taken out by a customer covers the risk? If for example there is a risk of increased building costs in a bushfire prone area, then why isnt the customer told? If he chooses to 'under insure' - strange term - then both sides should know the increased risk, and the impact should the risk eventuate. And the role of the Bank: once the equity in the existing mortgage has disappeared - burnt - then the Bank must negotiate either payout of the mortgage, or agreement to roll over the existing mortgage into a build/occupy mortgage. This article has a hell of a lot more to discuss and comment upon!


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