The sum insured – there’s a fair bit of confusion about just what this is and how to calculate it. However, when it comes to landlord insurance, nominating the correct sum insured is crucial.
So just what is the sum insured?
In a nutshell, the sum insured is the most an insurer will pay out for any one loss. In terms of landlord insurance, it’s the amount that the property and/or contents would cost to replace if something happens to them.
Some policies have a standard sum insured, depending on the type of cover. Other times, the policyholder nominates the amount they want the insurance company to cover. The sum insured is ultimately the replacement value.
Not sure what an underlined word means?
No worries – just scroll to the bottom of the page for a full glossary.
Why is the sum insured important?
Insurers base premiums on the sum insured nominated. Typically, if the sum insured is higher, so too is the premium. This is because there is more to pay in the event of a claim.
Because of this, some landlords choose to nominate a lower sum insured, to save money (which is not a good idea).
However, it’s important to understand that the sum insured is the maximum that an insurer is liable to pay out in the event of a claim. So, if the landlord gets the sum insured wrong, they are at-risk of being under-insured or over-insured.
Under-insured
If the landlord nominates a sum insured that is insufficient to cover their loss (e.g. they nominate the replacement value of their property to be $200,000 when it is really $300,000), then they are ultimately under-insured and will be left to find the money (in this case, $100,000) to make up the shortfall.
Over-insurance
Nominating a sum insured that overinflates the replacement value is problematic too. If a claim is made, most insurers will only reimburse the landlord for the actual cost of the loss they have suffered.
This is a way that insurers help to prevent fraud – as a person cannot seek to profit from an insurance claim by being paid more than their property is valued at.
By being over-insured, the landlord is simply paying a higher premium than they need to, as they will not be able to claim the inflated replacement sums.
So how do you calculate an accurate sum insured?
When it comes to working out the sum insured, it is important landlords gets an accurate costing.
Unless you happen to be a quantity surveyor, you shouldn’t be suggesting a sum but rather offering general guidance (e.g. pointing the landlord in the direction of a builder who can give them an accurate replacement cost).
Quantity surveyors or builders will base the sum insured on current re-build costs which factor in building standards, natural disaster mitigation requirements, demolition and so on. A quantity surveyor can also provide an accurate replacement cost for contents.
For landlords who do not wish to engage a quantity surveyor, there are a number of sum insured calculators available online, such as those offered by the Insurance Council of Australia.
If your landlord is looking at doing their own calculations, consider sharing these tips:
- Building sums are based on the cost of replacing the building structure itself, its fixtures and other features like sheds, decking, driveways, pool, and fencing – and don’t include the value of the land these sit on.
- Ensure the calculations are based on current building costs and allow for current building standards to be implemented including risk mitigation requirements (e.g. in some areas, a landlord may be required to equip their investment property with fire sprinklers or cyclone shutters – these costs should be taken into consideration when working out a sum insured).
- Include the cost of removing debris, and the cost of architect and council fees.
- Do not base the building sum on its market value, rates valuation or the valuation provided by the bank.
- Contents sums are based on the landlord’s contents at the rental (e.g. fittings, furnishings) – not the tenants’ possessions.
- Base contents replacement on a new-for-old basis, not on the value of assets in tax accountant spreadsheets – these figures will factor in depreciation (written down value).
- Before calculating landlord contents, check how the insurer defines contents. Do they include goods left at the premises for tenant use as contents? Or include cover for landlord goods at the premises but not available for tenant use (e.g. items locked in sheds)?
- Landlords who own property within strata complexes should check to see what is covered under the body corporate’s strata insurance so they can determine what contents in the unit need to be insured separately.
Replacement costs change over time, so it’s important to base the sum insured on current figures when taking out or renewing a policy.
Nominating an accurate building sum insured is critically important, particularly when construction costs are increasing sharply, as they have done in recent years.
It’s also wise to review contents replacement costs, especially if contents at the rental have been added, replaced or upgraded with better quality and more expensive items.
FYI: When it comes to losses relating to rental income, claims are based on the actual loss incurred, not a nominated sum. The landlord will need to provide the insurer with details (and evidence) of the weekly rent.
The sum insured is an important component of a landlord’s insurance policy. Getting it wrong can have serious financial consequences down the track.
So, if in doubt, get in touch with the landlord insurance provider for more information.
Glossary
- Bank valuation – an assessment of the value of a property, for the owner’s bank.
- Claim – the request the policyholder makes from their insurer if they suffer a loss or damage that is covered by the insurance policy.
- Depreciation – the loss in value of property over time due to factors such as age and wear and tear.
- Fittings – things that are not permanently fixed to the building (freestanding items such as furniture or whitegoods).
- Fixtures – things that are secured (or ‘fixed’) to the building (light fixtures, built-in wardrobes, kitchen cabinets).
- Market value – the amount of money the property is worth or would be worth if it was sold in its current state.
- Over-insurance – where something is insured for an amount of money that is more than it’s worth or reasonable value.
- Premiums – the amount of money that is paid to the insurance company for the insurance policy.
- Quantity surveyor – a qualified professional who specialises in building measurement and estimates the value of construction costs.
- Rates valuation – the figure councils use to determine the property rates, calculated by multiplying the gross rental value (GRV) of the property by the council’s rate in the dollar.
- Replacement value – the amount needed to replace damaged, stolen or lost property by buying new items.
- Under-insurance – when the policyholder does not have enough sum insured in their policy to cover the value of the items they are insuring.
