And What It Could Cost You?

According to RSM Tasmania Insurance Broker Hobart, the “Underinsured Gap” is the difference between the value of the insurance cover (Sum Insured) and the actual cost of replacing what was insured. It becomes most prevalent with Home or Commercial Building insurance.

The global inflationary run over the past 2-3 years has had a profound effect on many costs, not the least of which is building costs. Higher input, land, finance and labour costs have seen building costs soar by as much as 60% in that time.

From an insurance perspective, this presents a huge problem. Sums insured are usually rolled over or indexed by an amount of about 3-5% each year. But this means the sum insured is not keeping pace with the replacement cost should the home or business be lost or badly damaged.

While your insurance may have been adequate for your needs 3 years ago, it is quite possible that you could be as much as 20-50% underinsured right now.

So, in real terms, what does being underinsured by 20-50% really mean for business and property owners down under? Let’s break it down with some simple examples, and a little bit of necessary jargon.

The Rebuilding Gap: Imagine the Sum Insured for your business premises is noted in your policy as being $1.5 Million, but the real cost of replacement for the building is $2.0 Million.
Should the worst happen—like, a fire, and the building is destroyed you may need to fork out another $500,000 from your own pocket to get everything back to spick and span. For some businesses that could be terminal!

Patching Things Up: Let’s say a storm rolls through and leaves a $200,000 dent in your property. If you’re only covered for half of what your property’s actually worth, the insurance might only cover $100,000. That leaves you scrambling to cover the other half yourself, which is hardly what you want when you’re already dealing with the aftermath of a storm.

Plus, of course, you may not be able to trade while repairs or rebuilding is taking place.

Business on Hold: Let’s say a large commercial catering company operating in a suburban town centre took out a Business Interruption Policy for 20k but their disclosed annual turnover is $1.2 Mill. and the business is out of action for 3 months. This equates to losses of around $200.000 but the insurer only covers you for $4166.00, because you only insured for 20k. You are now out of pocket more than $195,000.00

Debt Drama: And finally, to cover the gap between the insurance money and the actual costs, you might have to hit up the bank for a loan. That means interest payments stacking up on top of everything else. Not exactly ideal.

Legal Bingles: OH! and here’s another kicker—if your lease or business contracts say you need to be insured up to a certain level and you’re not, you could be up for some legal stoushes.

Bottom line? It’s a good idea to give your insurance cover a once-over, especially with the way costs are ballooning. Make sure it matches up with the current rebuild value of your property. A bit of time spent now can save a lot of headaches and hard-earned cash down the track.

Now, please remember, all of the situations referred to in this article are examples only. You need professional guidance to make sure you have got it right.

What’s the best way to make sure you have it right?

Talk to Roger Hosie from RSM Tasmania.
Call Now! (03) 6244 7854, or email roger@rsmtasmania.com.au 

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