Whenever we take out an insurance policy, we are entering into a contract with the insurer. Whether household, motor vehicle, personal accident or any other type of policy, it is a legally binding contract between the insurer and the insured.

For householders, insurance of home building and contents is vital, not merely for peace of mind but to maintain the lifestyle they are accustomed to if the unthinkable should happen.

There are several aspects to consider when purchasing household insurance.

• The insured has a duty to disclose to the insurer anything that they know or could reasonably be expected to know is relevant to the insurer’s decision to accept the risk and, if so, on what terms. For obvious reasons, this is called the Duty of Disclosure.

• Each party to the contract (i.e.: insured and insurer) has an obligation to each other in accordance with the clause of Utmost Good Faith.

Utmost good faith means that in every dealing between insured and insurer, all parties are obliged to act in a totally scrupulous manner – that is: in a spirit of Utmost Good Faith. This clause overrides all other clauses in the policy and is the measure by which the majority of insurance disputes are settled.

• The sum insured is a major consideration when taking out an insurance policy. It not only affects the cost of the premium but the insurer’s liability if a claim is made. For home building and contents insurance, the sum insured is, arguably, the most crucial aspect and the importance of “getting it right” cannot be overstated.

According to The Insurance Council of Australia, approximately 43 per cent of home building and/or contents policyholders are significantly underinsured.

Determining the Sum Insured

For many people, determining exactly how much to insure their home building and contents for is a daunting task. It needn’t be, however, with a few guidelines to follow.

Most insurance companies offer replacement cover for household policies – or “new for old” so it is important to insure the building and contents for their full replacement value, not their value after depreciation.

• Home building insurance: The sum insured is based on the total cost involved in rebuilding the property to its original or a comparative state. In addition to the actual building expenses, this includes the costs of demolition and removal of debris as well as any associated engineering, architectural and council requirements. Consultation with a professional builder or property valuer is recommended.

• Home Contents Insurance: The most effective way of determining the sum insured for contents insurance is to conduct a room-by-room inventory. Simply go into every room, listing the individual items in each. Next to each item, write down how much it would cost to buy that item brand new.

Most insurers provide literature, online information and calculators to assist with determining sums insured.

As previously stated, the sum insured determines the insurer’s level of liability in the event of a claim. If the property is underinsured, the result can turn an already traumatic event into something more devastating.

Some insurance policies contain an “average clause” or “co-insurance clause.” What this means is that in the event of a claim, if a property is found to be significantly underinsured, the liability of the insurer will decrease commensurate with the level of underinsurance.

Let’s look at a hypothetical example without the average clause:

A home is gutted as a result of bushfire. There is nothing retrievable. The homeowner had insured the building for $200,000.00 and the contents for $10,000.00. When assessors inspected the ruins and collected all the information about what was lost, it was determined that the actual replacement value of the building was $400,000.00 and for the contents, $20,000.00.

The insurer, however, was only obliged to pay a total amount of $210,000.00, less any excess, and did this. The insured could not rebuild for the amount of the claim payment and had to settle for a much more modest home, fewer household contents and a significantly reduced standard of living.

Let’s look at another scenario with the average clause:

During a wild storm a tree falls onto a house, damaging the roof and part of the living room. Again, the building was insured for $200,000.00 and the contents for $10,000.00.

As in the previous example, loss assessors deemed the building’s actual value to be $400,000.00 and that of the contents, $20,000.00. The cost to repair the living room and roof is $30,000.00 and is well within the sum insured. However, the insurer was only obliged to pay an amount commensurate with the level of underinsurance.

The underinsurance level of the building was 50 per cent and so the insurer paid 50 per cent of the repair cost – i.e.: $15,000.00. Contents to the value of $8000.00 were also destroyed during the incident, however, the insurance payment, under the average clause, will be just $4000.00.

In total, the insurer paid $19,000.00, less any excess, when repairs to the building and replacement of contents actually cost $38,000.00.

These two examples highlight the importance of placing the correct value on home building and contents insurance policies and how decreasing sums insured to save a few dollars in premium costs is really quite a gamble that could have disastrous effects.

It far better to know that should an unfortunate incident occur, we can recover what is lost.

After all, isn’t that what insurance is all about?

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Here are few steps to get the low cost home insurance

Select the best low cost insurance company which quotes low premium and make clear how and why they figure such premium. Choose low coverage home insurance policy to get minimize the cost of home insurance hence the cost of policy depends upon the coverage you choose. You can get a low cost for home insurance by maintaining a clean and neat credit record. If you have an old house (at least 10 year old) you can improve your pumping and electricity system so that you can save money. Just a onetime investment is enough. Hence cost of insurance will be reduced. Brick house insurance cost will be low compared to frame house. Check whether you are paying twice for same insurance, some insurance such as pets and so on will be covered in home insurance policy itself. So your cost will be reduced. Always take multiple policies (like health, auto etc.) from the same company, so that you will get more discounts and hence premium can be reduced. Make some improvements in your house by providing some security systems like placing fire extinguisher and smoke detector, replacing by stronger windows, storm shutter, installing burglar alarm and so on. So that you can leave few options in your policy and hence cost premium will be reduced. Raise your deductible as high as possible to lower the cost of your policy In case you are retired and staying in home then, the chances of burglar, fire damages will be reduced. In such cases you are eligible for still more discounts and hence lower will be your cost of premium.

The cost home insurance quote depends upon the coverage we required and in most plans flood and earthquake losses are not included, in case you need to include it the premium will be high. Greater discount is given for taking home and auto insurance together in a same company.

It is not that landlords’ insurance premiums are directly related to property condition; however there is an indirect link that can make considerable difference to you. This is because the total cost of insurance is not just the premium, but also how a claim is settled. Failing to keep your property well looked after might not directly increase your landlord insurance premiums, but insurers may not wish to cover a poorly maintained property at all. And when it comes to paying a claim, the insurance company will look carefully at the state of the property to ensure that there is no degree of “betterment” in the settlement.

In other words, if premises already needed significant repairs before they suffered fire damage, the insurance company, when considering how much it will pay out for your fire claim, would take into account the money you would have had to spend on making them good in any event.

It is no good thinking that the building will be so badly damaged that the insurance company will never know – the majority of claims are not for total loss but for partial damage so there is likely to be plenty of evidence about. And even if the premises are totally destroyed, the underwriters may well look at the balance of your portfolio for an indication of how good the level of maintenance was.

If this sounds a bit too much like “big brother” for your taste, it is worth remembering that the money insurance companies pay out in claims comes from your landlords insurance premiums, so you do not want them paying out more than necessary to other people, or you will end up paying for their largesse.

Of course, it is important to ensure that you have the right landlord insurance in the first place. For residential buy-to-let properties, a standard home insurance policy will be unsuitable, partly because there is likely to be a condition that you are occupying the premises yourself, but also because some of the covers you will require are likely to be missing.

For example, only a special landlord’s insurance policy is likely to include insurance for loss of rent and to cover the cost of re-housing a tenant following damage (this is typically up to 30% of the buildings sum insured).

Similarly, most conventional home insurance policies will not cover extended periods of unoccupancy between lets, whereas a specialist landlord’s insurance policy will be more flexible, albeit subject to some sensible precautions being taken.

Specialist landlord’s insurance policies are also likely to be more accommodating when it comes to property construction; imposing additional charges only on exceptional properties such as those constructed substantially from timber or with a thatched roof. They will also include employers’ liability insurance, which is essential if you use direct labour for cleaning, repairs and so on.

Many of the landlords associations provide insurance schemes designed especially for buy to let investors and offering enhanced benefits and reduced costs for members. For many landlords, it is worthwhile joining one of these associations simply to take advantage of the competitively priced insurance deals.