Underinsurance: 'the system is broken and we need to fix it'

A leading quantity surveyor has flagged a growing underinsurance crisis in Australia and says brokers could be key to addressing it.

Director and co-founder of MCG Quantity Surveyors Marty Sadlier says reports show more than 80% of property owners could be underinsured.

The problem has worsened through the pandemic as supply chains have faltered, stretching rebuild timescales, and building costs have soared. Many owners have also renovated properties during the last few years but not adjusted their insurance accordingly.

Broker networks agree with Mr Sadlier, warning that insurers are increasingly applying underinsurance clauses on claims, and that in the current climate sums insured can easily become outdated within a 12-month period.

“The risk that we take when we are underinsured is high, very high,” Mr Sadlier tells insuranceNEWS.com.au.

His company specialises in building insurance replacement cost reports, and he believes online calculators are of limited use because they don’t address individual circumstances sufficiently, while standard property valuations do not give an indication of rebuild costs.

“We need to change the practices that we have been told in the past, we need to open our eyes to the fact that you need an expert,” he said.

“Given the fact that some 83% of Australian homeowners are underinsured, we say that [the system] is broken and we must fix it, together.”

Mr Sadlier says brokers can play an important role but believes “many feel conflicted”.

“They know the premium will go up,” he says. “So with certain clients they won’t push [the underinsurance issue] too hard.

“Just mentioning it isn’t enough, a simple comment noting it isn’t enough. It needs to be more robust and I think there needs to be a signed disclosure from the client that they don’t want to get a proper valuation.”

Insurance Advisernet GM Broking & Risk Services Josh Hamill told insuranceNEWS.com.au that underinsurance is an emerging and growing issue.

“We are seeing more instances of insurers coming back recommending underinsurance is applied to settlements. This only rears its head when there’s a claim but the consequences can be severe,” he said, referencing a recent hotel claimant that saw its payout cut by 50%.

Mr Hamill accepts businesses that have struggled through recent years won’t be keen to pay higher premiums, and that insurers also have capacity limits that could be breached by rocketing sums insured.

“It’s a massive impost from an expense point of view for a business,” he says.

“But we are pushing quite hard across our group that brokers should offer clients a quantity surveyor valuation. It’s the client’s decision, but our role is to inform them about the market and the inflationary pressures.”

CBN Executive Manager Distribution Leigh Frost agrees that sometimes a complex balancing act is required.

“In recent months we have had a number of claims across the network where there has been insurer feedback that underinsurance might be applied,” he said.

“These are complex times for advisers, and ensuring clients make the right level of insurance investment is often balanced against economic reality.”

But he says the “set and forget” approach is clearly not in clients’ best interests.

“Given the rate of change in property pricing, driven in many cases by the cost to build, it is more important than ever for brokers and clients to have a clear understanding of the cost to replace their property assets.”

He says brokers should also document any assumptions made in establishing sums insured.

“Where sums insured are varied from a valuation, clearly document the logic applied to any discounted sums and have the client and insurer acknowledge not just the variation but the reasoning applied.”