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.
Is your home covered for natural disasters?
Earthquakes, bushfires, cyclones - Oh my!
It’s every homeowner’s worst nightmare: losing part or all of your home to the devastating effects of a natural disaster. But the only thing that can make such a difficult experience even more traumatic is finding out the insurance — which you purchased in the belief it would provide financial support if such an event took place — will actually not be adequate at best, and will be completely useless at worst.
Those living in New Zealand can take comfort in the knowledge that the Earthquake Commission (EQC) is in place to provide insurance for damage to residential property sustained in earthquakes, storms, floods, volcanic eruptions, natural landslips, tsunamis and hypothermal activity for those who have home and/or contents insurance. The EQC provides cover for up to $100,000, and natural disaster insurance can be purchased on top of that to cover any damage that exceeds the EQC’s level of cover. Pretty straightforward, right?
But it’s a totally different story in Australia.
Variations between policies
In Australia, the variations in terms of natural disaster coverage in home and contents insurance policies can be quite vast. These variations often result in underinsurance, leaving people who thought insurance would cover the cost of rebuilding or repairs to foot a fairly significant portion of the bill out of their own pocket.
Of particular concern is the damage caused by floods and storms. In the case of the former, not all home and contents insurance policies provide coverage for such an event. In the case of the latter, while home and contents insurance policies do typically cover such an event, the level of coverage differs greatly among insurers.
As such, before you purchase a home and contents insurance policy, it is supremely important that you know exactly what natural disasters you are covered for, as well as how much your insurer will pay in the event of one of those disasters.
How flood insurance works
Following severe floods in New South Wales, Queensland and Victoria during the summer of 2010-11, a Natural Disaster Insurance Review took place. As part of the recommendations of this review, the federal government put in place a standard definition of “flood” for all home building and contents policies in order to limit confusion among consumers about what they are and aren’t covered for when it comes to flood insurance.
This universal definition of flood is as follows:
“The covering of normally dry land by water that has escaped or been released from the normal confines of any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or any reservoir, canal or dam.”
As such, any flooding that does not fit within the parameters of this definition — so anything that has been contributed to by human error, like a broken washing machine, a hole in the wall of your property, etc. — will likely not meet the requirements for coverage under your insurance policy.
The types of disasters to consider when purchasing coverage
In addition to flood (inland flooding accounts for nearly a third of insured losses in Australia), these are the other types of natural disasters you should be considering when selecting a home and contents insurance policy:
- Earthquakes — although Australia doesn’t have a high incidence rate of destructive earthquakes, there have been enough, four to be exact, in the last 40 years to make it worth considering as a key point of coverage in any potential policy.
- Cyclones — particularly if you are in the Northern Territory and northern parts of Queensland and Western Australia.
- Bushfires — there aren’t many parts of the country that are immune to the risk of bushfires, and we have seen multiple significant losses, particularly in recent years as the climate appears to be increasing in dryness and warmth, both of which are prime conditions for bushfires.
- Hail — severe hailstorms have become an increasing threat in recent years, and they have the potential to cause significant damage.
- Storms — as with bushfires, severe storms have the potential to cause widespread damage across most parts of Australia.
The key facts sheet
In addition to the development of a standard definition of the term “flood”, another recommendation of the Natural Disaster Insurance Review was a requirement that insurance companies provide consumers with a “key facts sheet” where home building and contents insurance is concerned. The key facts sheet must be concise and clear in nature. The aim of this requirement is to make it much easier for purchasers of insurance to understand exactly what their insurance policy will and won’t cover.
The institution of such a requirement should make it much easier for those seeking home and contents insurance to determine which of the above-listed natural disasters a potential insurance policy will cover.
What to check before making a policy purchase
As always, before you purchase an insurance policy, it’s important to get a range of quotes from different insurers and analyse the detail and coverage of each potential policy to ensure your ultimate selection is actually going to afford you coverage that matches your needs and situation. When purchasing a home and contents insurance policy, these are the questions you should ask yourself:
- Have I received the key facts sheet?
- Will the policy cover me in the event of bushfires, regular floods, flash floods and storms?
- Given the area in which my property is situated, am I at a particularly high risk for one or more of these natural disasters?
- What are the specific definitions applied to each natural disaster mentioned in the policy? How will these definitions impact my coverage?
- Are there any policy exclusions?
- What are the monetary limits to my coverage? Will this coverage be enough to account for repairs, or will I have to contribute out of my own pocket?
Don’t be afraid to ask these questions — as well as any others you may have — of any potential insurer. Their purpose is to provide coverage, and the only way they can do that adequately is if you are insured for all the right things.
When considering home and contents insurance, it’s also important that you have a fairly decent estimate of what your home is worth and what it would cost to rebuild or repair it. If you have the most accurate estimate, then you will be able to secure insurance that will be enough to give you peace of mind, at least, should the worst happen.