Over Insurance and Under Insurance

Have you ever wondered what it means to be over insured? This is basically where you are insured significantly above the levels of risk it is reasonable for you to accept. Usually it means you need to get the asset you are insuring. Underinsurance of your house or building means you may have to raise additional finance or sell your property for whatever you can get, to rebuild or replace your house in the event of its total loss. You may not be able to afford to rebuild in the same location/suburb.

Over insurance means you will be paying for more in annual premiums than you need to and will still only receive from your insurer the amount it actually costs to rebuild/replace your house. Under or over insurance results from the property owner failing to accurately estimate the total cost of replacing/rebuilding their house/premises.

How to estimate the total cost of replacing your house for insurance purposes?
Simple “Ready Reckoners’ are provided by insurers to allow clients to determine their house replacement costs. Unfortunately, a September 2005 report by the Australian Securities and Investments Commission (ASIC) called “Getting Home Insurance Right” found that despite help by insurers and use of the ready reckoners, owners frequently continued to either under insure or over insure to a significant level. However, the same ASIC report correctly identified a properly qualified Quantity Surveyor as the best professional to accurately estimate a replacement cost for insurance purposes.

A Replacement Cost Estimate (RCE) for insurance purposes provides the cost of rebuilding a property in the event of partial or total destruction. It includes the costs of demolition, site clearance, rubbish removal, professional fees, compliance costs etc as well as the costs of reconstruction and can be adjusted for inflation. In a partial loss, careful demolition is required to save the remainder of the building and this can result in more complex and costly procedures.

A Quantity Surveyor has access to a construction cost data base and estimating techniques necessary to determine the cost of construction which is the cost required for your insurance purpose. A market valuation as provided by a Valuer is not the same as the cost of construction and can vary considerably over or under the actual cost of construction.

What will it cost and how often do I need a replacement cost estimate?

The expense of a Replacement Cost Estimate (RCE) for a commercial or investment property is tax deductible for the owner. Unfortunately, it is not tax deductible for residential homes occupied by the owner.

The cost of obtaining an RCE from a properly qualified Quantity Surveyor will vary from property to property and depends on many factors e.g. property location, size, age, design, construction method, materials, complexity etc.

However, the RCE expense may be amortised over a number of years as in most cases RCE need only be done every 3 to 5 years or more depending on the type of property and the economic situation or inflation.

Consequently, the cost of an RCE for most suburban/city residential homes could average less than a couple of hundred dollars a year but owners will need to obtain a quote from a properly qualified Quantity Surveyor.


How do you contact an AIQS member?

Visit the AIQS website at http://www.aiqs.com.au and find the Members’ Business Register for contact and location details, or look in the Yellow Pages under Q and find the AIQS logo, or telephone (02) 6282 2222 or email contact@aiqs.com.au

The AIQS is a national professional body recognised internationally for its high
standards and with a large overseas membership. It is the regulatory body for the
quantity surveying profession in Australia and plays a major role in both national
and international peak industry bodies which influence Government and industry
policies and set standards of worlds’ best practice.