How much do you insure your properties for?

I insure for amount many lenders mandate....often ridiculous amounts....lincluding far more than buy price.....

If no mandate.....I insure usually for amount of decent building replacement.

 

It all depends on your risk profile
So if you have a wide enough diverse portfolio and you are not required to insure then by not insuring your saving is equal to the Insurance company''s profit plus their overheads expenses .

 

What you are describing is self insurance. Often wondered what threshold number of properties you need to start self insuring. Depends on your risk profile. My guess is 50 IPs.

 

You would need enough to cover the public liability component......

 

I am not certain what the threshold would be as risk is subjective and pretty personal .
Yes the public liability is a real risk but the probability and extent is pretty unknown
Many Govenments and many large corporation self insure
If I had no mortgages I would probably self insure many of my properties that have a high land value such that if the building was lost it would not be a major concern
Separating the ownership of the Land from the Building you could probably cap the public liability
Increasing the excess is sort of self insurance

 

Even if you owned 50 - You may then be forced to borrow or sell a property to release sufficient cash to replace the loss. You still have a loss of the replacement value of the building etc. Like a bonfire worth $250,000

Self insurance isnt insurance even if you banked and saved a contingency fund in cash. Lets call it for what it actually is - You are uninsured and must be capable of affording a total loss. The loss still occurs - Its just you have other resources to make good the loss. A person with 50 IPs and all are uninsured should consider their risk of loss is 50 times that of someone with just one. 50 times more foolish perhaps.

Imagine if the loss was a fire and it was due to old badly maintained wiring and a court finds you liable for the devastating loss of all the family bar one - They sue for damages. They could claim on the other 49 properties and juries tend to dislike and decide in favour of the greedy landlord who chose to uninsure and not maintain to save $$$. Yep that would come up in court. You cant self estimate the potential loss in such a case. What seems like a $200K building could be a $10m settlement with $$$ more for legals.

 

I wonder if @brettc could advise on his perspective on this?

Brett - how does this all work with EBM? What is EBM's view on underinsurance?

Thanks

 

Under-insurance is different to uninsured.

Under-insurance typically occurs when an insured value is less than the total loss. So say $100K cover but property value is $150K. So insurer will pay using a formula eg 100/150 x 100K so you get $66,666 as a total loss. The penalty for not paying the right premium is a pro-rata payout.

I would think insurers or brokers view on uninsured is that its the owners problem. No law says you must insure. But dont complain if you lose. Most lenders require cover to be maintained with a mortgage interest noted on the policy.

Insurance companies get bombarded in certain regions for cover as bushfire smoke becomes visible. Insurers decline to cover a claim for the first 72 hours as a blanket rule AND for the existing fire risk they refuse claims for a foreseen event if a serious / high fire rating applied at the time of the policy being taken. The warning must fall before cover is commenced. Its not stated in the policy but thats industry standard. Each insurer varies a little but fairly common..Same with flood. If its raining when you take out cover dont expect to be covered.

 

As someone else mentioned, some policies have an underinsurance clause which essentially means that if you only insure for 50% of the replacement cost, they classify it that you are self-insurance for the other 50%, and therefore will only pay out 50% of a claim. So if you have a claim for $20,000 they will pay $10,000 and expect you (the self insurer) to contribute the other $10,000.

RentCover policies do not have an underinsurance clause so it simply means we will not pay greater than your sum insured. If you insure for $200,000 and you have a loss of $400,000 we can only pay $200,000. If however you only have a $20,000 loss you are not penalised and could in theory receive the whole $20,000 (for a legitimate claim).

That said, underinsuring is a practice I would strongly advise against unless you really can afford to to absorb a total loss.

 

Thanks Brett. In the 2 below hypothetical examples, what would you recommend insuring the properties for?


Property 1 - 30+ year old house worth about $330k. To demo and rebuilt a much better house would be about $250k.

Property 2 - 30+ year old house on a large block (subdividable) worth $600k. Again, to demo and rebuild a better home could probably be done for $250k.

Would it be $250k for both?

Thanks

 

If you're comfortable if it all goes pear shape and the insurer gives you a cheque for $250k, that's the number.
Also ask yourself, do I spend an extra $40/year (or similar) to insure for $300k so that I don't have to find $30-50k in a major loss? Most people find it hard to justify the small additional outlay but even harder to find the larger lump sum.
Hope this helps

 

And what happens if you're over insuring?

So for eg it will only cost $250k to demo and rebuild but you've insured for $320k.... Will the insurer pay out the full $320k? Or will they get someone to look at the replacement costs and only pay you what it will actually cost to rebuild what was there? Assume if you had a 3/1/1 they will only give you what it would cost to build the same size house and same config?

Thanks

 

If you are insured for $320k and the insurer can pay someone to rebuild to put you back in the same position you were yesterday for $250k, it would make commercial sense for the insurer to do this.
If they can't rebuild to put you back in the same position you were yesterday, they write you a cheque for $320k.
This is a simplistic explanation but hopefully you get the idea.
So yep, no point paying for extra as long as you are comfortable with your number. If you have recently built in the area you would have an idea of current build costs.
In a total loss situation, most cases that I see people are underinsured.

 

what about a over-insurance? (is there such thing?)

I think my property worth around $600k but the insurance broker recommended to put $1m.(initially recommended $1.5m but I declined.)

 

Point to note. It's not what the property is worth, it is what it would cost to rebuild the house. Can be 2 very different numbers.

 

Understand that. I meant it would cost $600k to rebuild the building but initially the broker recommended $2.5m and then agreed to insure for $1m. (I checked the email again. initially the broker recommened the building sum insured to be higher than the purchase price.)

On the second thought, it won't cost more than $300k to rebuild. it's a small single story shop with a kitchen, a toilet and a cool room. no fancy interior or landscaping.

 

Cost to build

Use an insurance calculator - if you are below their recommended then you might have issues of underinsurance. If you are above their calculator then you might be over paying. However if you are paying what they recommend then it is up to them to have their numbers right as you gave them the details of what they recommend - up to you to decide if it is correct.

Doing QBE calculator I just did a average 15 square home and their number was approx. 450k, this is with average fittings. So if you insure for $250k then you are likely underinsured as there is a big discrepancy by about 45%. If you insure for 652.5k you could also over insured by 45% but if your quality was superior then you might not be. However if you said 400k or 500k then it could be argued.

Now you could build the a 15 sq home for say 300k however you haven't included demo, survery, architects, applications etc.

 

Insurance for $1m would be like throwing money away if the value of the rebuild incl clearing site and site oncosts is closer to $600K. Loss assessor will value the damage and loss and pay that. No more. They wont look at a 1950s 4bed fibro and assess a replacement brick and tile 4 bedroom two level McMansion.

Insurance broker should be able to guide you on estimating building replacement cost. Of course fitout and other matters can influence costs too. A waterfront property built with stone may be a very costly rebuild v's a clear resi site in the burbs. Interior images etc can assist if the condition is superior to standard eg from good renos etc

Assessors go back to things like images of the property, council approvals etc. You would need to satisfy them of reasons to enhance value (eg condition, age and finishes).

 

This is a helpful case study, thanks!

Are you actually paying 750pa for a $400k re-build? I'm paying about 50% more than that ... who are you using?

 

Great thread!

Anyone with recommendations where they get a good discount for multiple insurance policies (landlords for multiple properties, but also contents for rented PPOR, car, etc)....

I've looked before and come up empty