Know Risk is a community education program designed by the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) to improve our understanding of insurance and how it relates to managing the many risks we all face in life.
Home and Contents Insurance 101
Getting back to basics on home and contents insurance
Imagine your home is burning down and you have just 30 seconds to grab any of your personal possessions you want to save before the flames destroy the lot.
If you’re like most people, you’d probably choose something very personal and sentimental like a photo album or a child’s sporting awards. While items like this are priceless, pretty much everything else in your home — like your TV, fridge, stereo, bed, or even your clothes or the home itself — can be replaced in time.
Clearly the most expensive thing to replace is your home. Buildings don’t come cheap. Many people spend years repaying their mortgage and investing in home improvements. Losing a home could have a huge effect financially as well as emotionally. This is where home and contents insurance can play an important role.
No Insurance – the impact
Despite the risks, about 14 per cent of people have no home or contents insurance , and of those who are insured, many know they are not properly covered. One-third of people who have contents insurance (33 per cent) do not believe they have sufficient cover to replace all of their belongings in the event of fire.
This leaves them in a very vulnerable position if they have to make a claim. People who rent their homes are far less likely to be insured for their belongings than people who own their home or have a mortgage. Just four per cent of home-owners say they have no insurance for their home or its contents, while 43 per cent of renters say they have no insurance.
Depending on where you live, insurers may classify your home as being in a 'high risk area'. A 'high risk area' can be defined by the type of risk it faces, such as whether it is in a bushfire prone area, in a flood zone, or even in an area with a high crime rate. Area's defined as 'high risk' will generally incur higher premiums.
A typical home and contents insurance policy
A typical building and contents policy is presented in the form of a small booklet.
The policy has a number of elements that outline the:
- property that is covered
- events that are covered
- events that are excluded
- Optional and Extra covers
- general conditions
- schedule and policy details, for example, name and address of the policyholder
Home insurance is generally divided into two sections based on just what it is that is being insured—the home building or the home contents. The home contents section will generally attract far higher costs than the home buildings section, mainly due to the higher volume of claims and of policy administration costs they incur.
Home insurance policies must define exactly what is meant by the terms buildings and/or contents. While most definitions are easy to understand there are some that may seem borderline or counterintuitive.
A home insurance policy's definition of the term buildings will generally include:
- residential buildings like houses and townhouses and may include any professional offices or surgeries in those buildings (keep in mind that apartments, flats or units may be covered by the strata title. Double check with your body corporate to make sure).
- domestic outbuildings such as sheds, garages, carports and pergolas
- fixed coverings to walls, floors or ceilings. In Australia, these usually do not include fixed carpets (see below for clarification), curtains or internal blinds
- walls (including garden and retaining walls), decks, fences and gates
- infrastructure for services including gas, electricity, water, phone and Internet
- built-in items such as ducted air conditioning, in-ground swimming pools, heating oil tanks, water tanks, etc
- fixed appliances which are permanently connected to the electrical, gas or plumbing systems such as air conditioners, dishwashers, fans, hot water services, light fittings, room heaters and stoves
- blinds or awnings on the outside of the buildings
- permanent structures on the property used for domestic purposes—for example, TV antennas, paved paths and driveways, clothes lines, satellite dishes, built in barbeques, built in swimming pools
It may seem strange that fixed carpets are usually not regarded as part of the definition of buildings, but there is a very simple reason: carpets are subject to many claims such as water damage and burns. By classifying carpets as contents, insurers obtain a a more accurate premium? higher cost because the risk and ?cost for contents is much higher than that for buildings.
Insurers vary considerably in the ways in which they define what is meant by contents, however the definitions will usually include household goods and personal effects, or more specifically:
- furniture, linen, home wares
- carpets (fixed or unfixed), (in NZ, this is only carpets that are not glued to the floor), curtains and internal blinds
- portable domestic appliances, home computers and accessories
- swimming pools, saunas and spas that are not permanently installed, including accessories
- clothing and personal effects
- valuable items of jewellery, silver gold etc (subject to a monetary limit and further defined in most policies)
- paintings (subject to a monetary limit)
- projectors, screens and photographic equipment
- processed film, slides etc
- tapes, cassettes, discs, software etc
- tools and equipment (if used for business, professional or trade use these are usually limited to a small monetary limit eg $2,000. These should be covered separately under a commercial policy such as “General Property”)
- sporting equipment (subject to a monetary limit)
- money (subject to a monetary limit)
- motor vehicle accessories and spare parts not installed in the vehicle
- surfboards, sailboards, surf skis or watercraft under a specified length. Some insurers only cover non-motorised watercraft, while others will cover watercraft under a certain horsepower
- unregistered golf buggies, mowers, wheelchairs, mobility scooters
- other household goods that are not used for earning income
- contents owned by the insured’s children that are left with the insured while the children are abroad
- goods used for earning income at the situation (within defined limits set out in the policy) such as office and surgery equipment at the situation (within defined limits, otherwise such items should be insured under a commercial policy).
Most home contents polices ask you to declare 'collections' separately. A collection can be DVDs, stamps, dolls, CDs, toys or anything else. If in doubt, ask your insurer what can be identified. If you don't declare your collections, then you may not be able to claim the full amount of your loss if your collection is damaged or stolen.
Most insurers provide limited cover for valuables such as jewellery. You may need extra cover to adequately insure all your valuables.
While most home and contents policies will cover portable electronic devices such as smart phones, laptops or tablets if they're damaged in or stolen from your home, they won't be covered if something happens to them if you're out and about. However, there are a couple of ways you can cover your portable items.
Add to your contents insurance
If you already have contents insurance for your home, adding your portable electronic devices to your existing insurance can be a cost-effective option. It will raise the cost of your premium, but if you do have to make a claim, it usually won't affect your no-claim discount on your general contents insurance. These insurance policies are also more likely to cover accidental loss of your device. As always, check with your provider in terms of what cover they offer.
Separate portable insurance
You also have the option of buying insurance specifically for portable devices from companies that specialise in this type of insurance. If you didn't have contents insurance, separate portable insurance is a good way to ensure your highly prized portable items are protected. However, some insurers won't allow you to start a policy if your electronic device is not brand new. You should also check if you are covered for overseas travel.
Home and contents insurance: choice of cover
As with any insurance, the type of cover you choose will affect the premium you pay. Some policies cover you for defined events (e.g. burglary and fire) while others cover you for any accidental event. Others give you only limited cover if you take an item (e.g. a laptop) outside your home.
There are two main types of contents insurance:
- Policies that cover the value of your belongings
- Policies that replace your belongings with new items e.g. 'new for old'
'New for old' policies tend to be more expensive but you know you will received a newer version of the item you lost. When choosing your type of cover, work out what type of cover you want and weigh up the costs.
You can save money on contents insurance by choosing a higher excess. For example, if you could pay the first $1,000 of any loss, the insurance premium will be cheaper.
There are several terms used to describe this policy, mainly: defined events, named perils, listed perils, listed events and extraneous perils. Basically, the policy provides cover for only the very specific events outlined in the insurance contract.
Contents are generally covered under the policy:
- at your home
- at your home in the open air as a result of:
- storm, rainwater, wind
- theft or attempted theft – but usually limited to a small sum insured (eg $2,000)
- Contents away from the home anywhere in Australia up to (not exceeding ) 90 consecutive days subject to certain terms and conditions which may differ from company to company.
The types of events or perils covered include:
- fire, explosion
- earthquake (in NZ, earthquake may be offered only as top-up cover or excess beyond that for which the government’s Earthquake Commission is liable—see below)
- burglary or housebreaking or theft (excluding by a tenant or from any part of the building shared with another person who is not insured under the policy)
- theft of money or negotiable items by force used to enter the buildings (theft by a tenant is excluded) (there are specific Landlord policies available to provide cover for theft, malicious damage and other perils by tenants)
- malicious damage or vandalism (except by a tenant)
- escape of liquid from such things as fixed pipes, gutters, fixed tank or a drain, washing machine or dishwasher, aquarium or waterbed
- burning out of electric motors less than 10 years old
- accidental breakage of fixed glass, hand basins, baths and toilet bowls or cisterns
- riot and civil commotion
- impact by aircraft or aerial device, television antenna or dish, vehicles or animals
- storm, rainwater or runoff (excluding flood in Australia—see case study below)
- in New Zealand, damage caused by possums entering the home.
Accidental damage policies cover all accidental loss or damage to buildings or contents, and includes other additional benefits that a defined events policy does not cover. This includes cover for contents away from the home, and may include some of the additional benefits noted below. This generally means that accidental damage policies generally cover more things than defined events policies.
Contents are generally covered under the Accidental Damage policy:
- At your home
- Away from your home, anywhere in Australia and New Zealand subject to terms and conditions which may differ from company to company
A list of exclusions in either a defined events or accidental damage policy will typically include loss or damage due to:
- landslide other than the cover listed under the defined events policy earth movement, shrinkage or expansion
- subsidence and erosion
- water damage because of structural defect, faulty design or faulty workmanship
- flood, tidal wave or tsunami
- rust, corrosion, rot, mildew, gradual deterioration or removal of support
- depreciation, wear or tear or neglect
- defective workmanship
- defect in design
- rats, mice or insects
- tree roots
- gradual escape of liquid
- incorrect sitting of buildings
- breakage of mirrors, glassware, crystal, crockery or china while they are being used, cleaned or carried by hand
- water entering your buildings through an opening made for any building, renovation or repair work
- war, invasion, act of foreign enemy, civil war, rebellion, revolution, insurrection, military or usurped power, destruction or acquisition by government or local authorities
- nuclear weapons, ionising radiations, or contamination by radioactivity from nuclear fuel.
Be aware that this is not a complete list as each insurer will vary in the exclusions they apply, so make sure you read the product disclosure statement to see what is excluded in your policy. You wouldn’t want to get caught out.
*Tip – When calculating how much cover you need for your belongings, be sure to include everything in your home. Big ticket items like TVs, whitegoods, furniture or jewellery are usually the first things we think of but it’s the stuff you don’t think about, like your clothes, your kids’ toys, CD collection or cookware that can add up.
Most insurers have specified limits when covering certain items in your home including:
- jewellery and watches
- handwoven rugs or carpets
- paintings, photography, sculptures, antiques or other works of art
- collections of any type.
However, insurers do offer extra cover for these item types which will increase the value covered by your policy. Of course, any additional cover bought will mean your premium will also increase. Talk to an insurance broker or your insurer and find out how much your highly valued special items will be covered for and work out whether you need additional cover.
Home and Contents Insurance: What risks are covered
Burglary, Theft or Housebreaking
This type of risk is fairly self-explanatory. It involves loss and/or damage caused by thieves. Theft of money may need to involve forcible and violent entry or insurers may reduce the limit of cover without evidence of such an entry. Some insurers may include coverage for theft of a handbag and/or wallet outside the home following violent physical assault and most insurers will offer a reduced level of cover for theft of contents in the open air. Most insurers will require a police report to confirm the burglary / theft claim.
Common exclusions are: theft by the policyholder and/or family members, theft by tenants, theft by a person at the address with the consent of the policyholder, their family or tenants and people acting with the consent of the policyholder, their family or tenants.
Covers loss or damage caused by an earthquake. Most insurers also cover loss or damage caused by landslides that occur immediately as a result of the earthquake and loss or damage for a period after the earthquake (usually 72 hours). An additional earthquake excess (usually $200) applies to the majority of policies.
Electrical Motor Burnout
This covers accidental damage occurring at the property to a domestic electric motor, for example a fridge, freezer or washing machine. The damage is caused by the melting together of the windings from overheating triggered by an electric current. Some insurers will place a limit on the age of the motor and may apply depreciation. This cover can be included in the policy or offered as an option. In some cases, insurers will also cover you for spoilage of food should your fridge or freezer suffer motor burnout. As always, it’s best to read your PDS or contact either your insurance broker or insurance company for details.
Common exclusions are: a lighting or heating element, a fuse, an electrical contact or switch, a motor covered by a guarantee or warranty, any radio or television, a printed circuit board, any amplifying electronic equipment, leaking of refrigerant gas and retrieving and replacing pool or submersible pumps.
Escape of Liquid
This type of cover is meant to cover the sudden bursting, leaking, discharging or overflowing of dish and clothes washing machines, refrigerators and freezers, waterbeds, pipes, gutters, downpipes, water tanks, toilets, baths, basins, sinks and water mains located next to your home. Some insurers include costs for searching for the source of the leak.
Common exclusions are: the repair or replacement of the defective part or parts, gradual leaks and showers without proper waterproofing.
Explosion, Lightning, Impact
An explosion usually requires physical evidence and most insurers will exclude the repair or replacement of the item that exploded.
Fire is considered burning with visible flames to an item not intended for that purpose. Most insurers do not offer bushfire cover for the first 48 hours after you’ve taken out a policy.
Common exclusions are: sparking, scorching, melting or where there is no evidence of flames, and the application of heat to any part of insured property.
Flooding can cause extensive damage to your home and contents which means it’s very important to understand the different types of floods and how your insurance policy may cover it.
Australian regulators introduced standard definition of flood in June 2012 which all insurers were to ensure all policies were updated by June 19, 2014.
In insurance terms, a flood is often defined as the covering of normally dry land by water that has escaped or been released from the normal confines of:
- any lake, river, creek or natural watercourse, reservoir canal or dam - whether it’s been altered or not.
While flood insurance is often built into a range of insurance policies, such as home and contents, strata title and business interruption, the risk of a flood will have a major effect on the cost of your premium. Basically if your home is in an area with a higher risk of a flood occurring, your premium will be higher.
Insurers can treat flood coverage in a variety of ways such as:
- including it as a compulsory part of your household policy
- adding it as a standard inclusion but allowing you to remove it – this is known as opt-out flood cover
- only covering flooding up to very low defined values – for example, if the damage is $15,000 or less
- not cover it at all.
This covers loss or damage caused by a deliberate, intentional, malicious or criminal act designed to cause damage.
Common exclusions are: (a) damage caused by the policyholder and/or family members (b) damage caused by tenants (c) damage caused by a person at the address with the consent of the policyholder, their family or tenants and (d) damage caused by a person acting with the express or implied consent of the policyholder, their family or tenants.
Riot or civil commotion
Covers loss or damage resulting from a riot or protest and the damage caused by the authorities in controlling such an event. Some insurers will include industrial strikes and/or political protests while others will exclude riots or protests that turn into a rebellion.
Spoilage of freezer food
This will generally cover the accidental spoilage of food and other goods stored in a freezer or refrigerator, caused by breakdown, motor burnout or an electrical failure. Some insurers extend this cover to refrigerated (i.e. not frozen) food also. There is usually a limit of cover for the cost to replace the spoiled food so make sure you read your PDS or contact your insurer for more information.
Common exclusions are: spoilage as a result of strikes and the intentional switching off or disconnection of electricity supply.
Storm, rainwater and wind
Storm cover usually includes loss or damage caused by violent wind, cyclones or tornadoes that may be accompanied by rain, hail or snow. Most insurers will exclude coverage for the first 48 hours after you’ve taken out a policy.
Most insurers will offer reduced cover any damage to property left outside in the open air such as sports equipment, clotheslines or play equipment.
Common exclusions are: damage to trees, plants and shrubs and damage to retaining walls.
Additional Benefits which may be included under either Defined Events and Accidental Damage policy, but also depend on if you have building and/or contents cover:
- Accounting fees for tax audit which will be limited to a sum insured
- Alternative accommodation when an insured event has occurred and you are unable to live in your home (time and monetary limits apply)
- Contents stored in a commercial storage facility unit – but you must advise the insurance company full details of the storage facility and the contents being stored
- Contents in transit (terms and conditions apply)
- Misuse of Credit card – after being stolen, or being fraudulently used on the internet
- Removal of debris and demolishing
- Damage to documents
- Funeral expenses
- Guests or visitors belongings
- Mortgagee discharge costs – following claim of total loss of your building
- Costs associated with rebuilding following an insured event (eg architects fees, legal fees)
- Replacing locks and keys / recoding of locks and barrels if your keys are stolen. (Most insurers would require this to be reported to police
- Replacement of trees, shrubs and plants – subject to certain events
- Pet / Veterinary costs – if your pet is injured as a result of a road accident – monetary limit applies
When it comes to covering the cost of rebuilding your home/building, most insurers offer 'sum insured' policies. Sum insured polices cover you for a specific and predetermined amount e.g. $500,000. While common, these types of policies can be limiting as:
- it may be hard to accurately value the cost of replacing your home
- inflation can mean that, even if you originally had an appropriate level of coverage, that amount may become inadequate
- rebuilding after natural disasters can be more expensive than usual because the increased demand for tradespeople pushes prices up
- changes to planning laws may make it more expensive to rebuild the property than first though.
Total replacement policies will cover the total cost to rebuild your home, regardless of inflation or any additional costs. Of course, a total replacement policy may come with a higher premium than a sum insured policy. Ask your insurer which type of cover they offer and what the differences are.
An excess is the amount you have to pay for each insured incident when you make a claim. In some cases, your insurer may ask that you pay the excess up front but generally, the amount will be deducted from any payment made to you after you claim. When buying the policy, insurers will offer you a variety of excess options to choose from. If you choose a higher excess amount you will receive a discount on your monthly / yearly premium but if you choose a lower amount, your premium will increase. When buying your policy, work out how much excess you're willing to pay should you need to make a claim and ask your your insurance broker or insurer how that affects the cost of your premium.
The premium is the annual cost of your insurance policy. Insurers will usually provide a range of options in terms of paying the premium, from one yearly payment to monthly payments to weekly payments. The cost of your premium is calculated depending on the type of home you have, where it is located, whether it is in a 'high risk area', how much you want to cover it for and the level of excess you're willing to pay. Some insurers also allow you to bundle your policy with others in order to reduce the cost of the premium. For instance, if you bought home, contents and bundled it with car insurance, you may get a reduced premium on all three premiums. Ask your insurance broker or insurer about remium options and work out which option is most beneficial.
Home and contents insurance: basis of settlement
Generally, insurers will pay out claims differently, depending on whether you claim against the buildings or contents part of the policy
Most insurers will pay the cost to restore, repair or replace the damaged buildings to the condition they were in when new. Of course, it will depend on how much the building is insured for. If there is $250,000 worth of damage and the policy only covers you for $200,000 then the insurer will only repair, replace or restore the building to that amount.
Depending on whether the policy is a sum insured or total replacement policy, your home or building insurance will usually cover any structural improvements you've made to your home. However it is advisable to contact your insurer prior to making any improvements because they could increase the value of your home leaving you underinsured or void your insurance entirely.
Insurers will usually pay out a claim on your contents insurance in one of two ways:
- by replacing the damaged item with the nearest equivalent model, or
- repair or pay for the repair of the item to the condition it was in when new.
However, there may be some restrictions on these replacement conditions: for example, depreciating contents such as linen, carpets, soft furnishings and clothing may only be covered for replacement conditions if they are less than ten years of age. Most insurers will also specify that a claim for damage to carpet, rugs, curtains and internal window furnishings will be limited to replacing the items in the room where the damage occurred.
Items such as stereos, televisions, and other electronics that are old or obsolete may have similar limited replacement conditions written in.
Some insurers will offer other ways of settling claims for homes and contents and need to be defined and agreed upon at the time the policy is bought. For example, holiday homes in New Zealand are often insured for current market value or equivalent, or replacement value with an amount for depreciation for age, wear and tear deducted.
What if I am renting?
Many people think that because they are renting, they don’t need to worry about insurance. But what if the place you were living in burnt down? What about your goods and belongings? If something happens to your place of residence, your possessions aren't protected by your landlord’s insurance. As a tenant, you want to ensure your contents are properly protected from a range of risks.
Add up how much it would cost to replace your stuff if was lost or stolen. Even if you don’t really have any high-end electronics, expensive cookware, or extravagant jewellery, imagine having to replace something basic like your clothes or furniture.
Renters insurance is a lot cheaper than home and contents insurance and if you shop around, you should be able to get a policy that covers $10,000 worth of possessions for around $20-$30 a month (with some conditions). And, as with every insurance product, shop around, do some research, talk with friends, and consult with a professional.
If you own a residential property (including units, townhouses, flats, home buildings) and rent out to tenants you should consider a Landlords policy to ensure you are covered for events caused by your tenants. These are usually a defined events policy with special endorsements suited to landlords and may include:
- Loss of Rent-
- if tenant vacates the premises without giving you the required notice in accordance with the lease, leaving unpaid rent (time limited say 6 weeks)
- If a court / tribunal order for the termination of the tenants Lease on the grounds of rent arrears (time limit max say 15 weeks)_
- Failure to give vacant possession – payable where your tenant refuses to pay rent and resisted all attempts by you or your Property Manager to gain vacant possession following service of the Court/Tribunal/Bailiff order (time limit say 6 weeks)
- Death of tenant (when sole tenant) (time limited say 15 weeks)
- Hardship – payable if court awards tenants release from their lease obligations (over and above bond monies) due to hardship
- Untenantable - payble where your property becomes untenantable for minimum (say 7) days due to: (time limited to say 52 weeks)
- Malicious damage by tenant
- Murder / Suicide or attempted murder/suicide
- (time limited eg 6 or 15 weeks, or until property is re-let, lease expires – whichever occurs first)
- Replacement of locks and keys – where claim has been accepted by a defaulting tenant and the tenant has not returned the keys (sum insured limited).
Exclusions and the Earthquake Commission - New Zealand
The New Zealand earthquakes of 2011 devastated the communities in and around Christchurch, but also radically changed the way the New Zealand insurance industry deals with disaster and catastrophic events. In the wake of the earthquakes, most major insurance companies have announced changes to the “full replacement” house policies that were in place at the time, replacing them with “fixed value” insurance.
What does this mean?
Basically, the change means that you will no longer be able to insure your property for whatever it may cost to replace it. Now you will need to work out exactly how much it will cost to rebuild it beforehand and insure it for a specific sum - similar to a car when you have fixed value insurance. This is called changing “replacement” policies to “sum insured” policies.
Why the change?
Insurance companies need to spread their risk and they do it by buying insurance policies with re-insurers. Since the earthquake, re-insurers want to know exactly how much it costs to fully replace a house. These reinsurers are pushing for the change.
What do you need to do?
Be sure to read all the letters and paperwork that comes from your insurer this year. It should explain any changes. If your policy has been changed to a "sum insured" policy you will need to work out a replacement value for your home.
How do I do that?
The insurers are expected to offer a web-based service that helps you to calculate the correct sum insured. It asks all sorts of questions about your home, then at the end, the calculator provides you with an estimate of the amount required to rebuild your home.
A Product Disclosure Statement ( PDS) is a legal document, or sometimes a group of documents, that contains information about your insurance policy. A PDS will typically include any significant benefits and risks, the cost of the policy and the fees and charges that the policy provider may receive. Supplementary PDSs may be issued from time to time and must be read in conjunction with the PDS to which they relate. A PDS will help you understand the insurance policy and give you the the information about the terms and conditions, policy benefits and exclusions that you can use to compare differet policies. You should be aware that a PDS doesn't take into account your individual needs or financial situation.
Reading the PDS will help you compare and make an informed choice about the policy and give you information on you how your insurer will respond if you need to make a claim. And most importantly, if you don’t fully understand the PDS contact your insurance company and ask for more information. It's always better to have more information than less.
When you take out a new policy make sure you have the details of your new product explained to you and confirmed in writing. In most cases, you will also have the benefit of a 30-day cooling off period. This means if you change your mind in the first 30 days after joining, and haven’t made a claim for benefits on the new product you may get a refund of any contributions you’ve paid.