How To Avoid The Five Biggest Insurance Traps

Sun Herald

Sunday April 10, 2005

Leo D'Angelo Fisher

Choosing the right cover doesn't have to be a nightmare, writes Leo D'Angelo Fisher.

GENERAL insurance is often a grudging purchase probably the reason most of us don't pay the attention to the detail that is necessary to take out policies that actually meet our needs.

Whether it's home, contents, travel or business insurance, there are so many options, variables, exclusions and conditions that the wrong choice can expose you to a myriad of traps. Here are five of them.

1. Under-insuring your possessions

For some, under-insuring is a way of keeping premiums down; for others it's a case of near enough is good enough. Either way, it's asking for trouble. If your home or contents is insured for less than their replacement value, it could come back to haunt you.

Most insurers pay up to the sum insured, so if a $200,000 house has been insured for $100,000, the insurer will only pay $100,000 if the house is destroyed.

However, consumer website Insurance Watch (www.insurancewatch.com.au) warns that your insurer may disqualify part of your claim even if the claim is for less than the full sum insured. For example, if you have insurance for $60,000 but the total replacement cost of your contents is really $100,000, a claim for $10,000 could be scaled down to $6000 by the insurer.

Solution: There are better ways to reduce premiums. You can save money on your home insurance by selecting a higher excess the part of the claim you must pay or by insuring home and contents on a combined policy with the same insurer. Also, many insurers offer lower premiums for improved security measures.

2. Underestimating rebuilding costs

Even if you think you are insured for the full cost of rebuilding your home, you may not be.

When choosing the level of cover, many people fail to factor in key rebuilding costs such as architect's fees, engineering and council costs, temporary accommodation and removing debris. These can add 10 per cent of the value to the cost of a rebuild.

Solution: Ensure the adequacy of your home building insurance by obtaining a quote for the cost of rebuilding your home from a professional builder or valuer. Insurance Council of Australia (ICA) executive director Alan Mason says: "Land value is irrelevant to insurance cover." Costs such as debris removal and temporary accommodation may be calculated as part of the sum insured or as a percentage additional to the sum insured.

3. Falling foul of exclusions

Items you might reasonably expect to be covered may in fact be excluded. For example, "new for old" contents insurance policies provide full current replacement costs for stolen or damaged items.

But consumer website Insurance Watch warns that some policies will not replace new for old if the product is more than 10 years old. Also, some insurers exclude soft furnishings, such as curtains.

And contents such as jewellery, art and antiques may be excluded unless you specifically request their inclusion, which may bump up your premium.

Some insurers will even require the valuables to be insured under a separate policy. Valuables likely to travel with you, such as a wedding or engagement ring, cameras and laptops, may not be covered away from the home if they're not listed and valued on your policy.

Solution: Read your policy carefully to identify exclusions, particularly when renewing, when new terms and conditions may apply.

Alternatively, ask your insurer, broker or agent to spell out the exclusions before you take out or renew your policy. They might seem acceptable now, but what about when you come to claim? Ask what alternatives are available to you.

4. Buying incomplete travel cover

Remarkably, some travel insurance policies don't receive universal recognition overseas. If your insurance underwriter is not recognised in the countries you're visiting, you may be denied admission to a hospital.

Even in countries where Australia has reciprocal rights for Medicare-type cover (such as Britain), if beds are not available in a public hospital you may still end up being treated and charged as a private patient.

Solution: Ensure your policy is recognised in the countries you're visiting. The insurance council recommends unlimited cover for hospital and medical costs for the US, Japan and Europe.

5. Failing to protect your future

If you own a business, chances are you will be insured against multiple risks loss of assets, fire and perils, damage to goods in transit and liability, to name a few.

But are you insured against the impact those risks may have on your business continuity?

The ICA says that 42 per cent of insured small businesses have no interruption insurance, which provides cover if a business cannot be operated because of damage to its property.

Cover ensures that continuing expenses are met and anticipated net profit is maintained through provision of cash flow.

The ICA warns that 70 per cent of underinsured and uninsured small businesses affected by a major event such as a legal claim, earthquake, fire or storm don't recover.

Solution: Get covered!

CASE STUDY

WHEN accountant and motorcycle enthusiast Daniel Watts upgraded to a new Honda CBR 600RR sports motorcycle, he was unfazed by the $15,000 price tag. But he baulked at the cost of the motor vehicle insurance he was offered by the dealer.

The cost of comprehensive insurance for Daniel's previous motorcycle, which was of a similar category to his new superbike but valued at $10,000, was $650 a year. Yet the policy available through the dealership was $1400.

Daniel had expected to pay more for his insurance because of the value of his new motorcycle, but not more than double. He took the unusual step of bargaining for a better deal.

"Basically, I thought I was being ripped off," he says.

He told the dealer that unless the cost of the insurance was revised he would walk away from the purchase. The result: the premium for the policy was negotiated down to $850, without impacting on the coverage provided.

Daniel was amazed that there was scope for such a dramatic discount on the insurance policy.

"How many people would come in and pay the original price [for an insurance policy] because they don't believe there's room to move?" he wonders.

© 2005 Sun Herald

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