Everything you need to know about building insurance

Insurance is one thing that many Aussies overlook.

But whether you’re a homeowner or investor, it’s important to make sure you’re covered against anything happening to your property.

And for strata-titled properties, building insurance is included in your quarterly owner's corporation or body corporate fees so owners just need to ensure they have adequate cover for their property's contents.

In fact, most Australian home loan lenders require borrowers to take out home insurance as a condition of formally approving the loan.

Even if you’re fortunate enough to own a property and not have a mortgage, it is still vital to insure your property.

After all, how would you repair or rebuild your property in the event of a fire, flood and any other type of permanent damage?

Here, I’ve gone through everything you need to know about building insurance - the what, why, how to get it and how to use it.

What is building insurance?

Insurance is ultimately a risk transfer.

You relieve yourself of risk (and worry) and pass it over to an insurer, for a cost.

If something unexpected happens – and it is covered under the terms and conditions of your insurance contract – the insurance company pays you for the loss or damage.

So when it comes to our homes or investment properties, building insurance can help you to cover the costs of replacing or repairing your property if it is destroyed.

The building insurance typically includes the physical structure of the property and also permanent fixtures such as kitchens, bathrooms, fences, garages and even sheds.

What does building insurance cover?

Given, that building insurance typically refers to insurance coverage against a range of risks such as fire, storm damage, vandalism, and other specified perils, the coverage can vary depending on the insurance policy and provider.

But here are some common types of coverage that building insurance in Australia may include:

• Building Structure: This covers the physical structure of the building itself, including walls, roof, floors, windows, doors, and fixed structures like built-in cabinets.
• Fixtures and Fittings: Coverage for fixtures and fittings within the building, such as built-in appliances, lighting fixtures, and bathroom fittings.
• Fire Damage: Protection against damage caused by fire, including damage to the building structure and contents.
• Storm Damage: Coverage for damage caused by storms, including strong winds, hail, and heavy rain.
• Water Damage: Protection against water damage from burst pipes, leaking roofs, or other plumbing issues.
• Vandalism and Malicious Damage: Coverage for damage caused by vandalism or intentional acts of destruction.
• Theft: Protection against theft or burglary of the building or its contents.
• Liability Insurance: Some building insurance policies may also include liability coverage, which protects the policyholder against legal claims arising from injuries or property damage to third parties.
• Extras: Emergency repairs, counselling services, clean-up fees, temporary accommodation, building modifications and funeral expenses where a household member dies as a direct result of an insured event may also be covered in some circumstances.

What is an insurance premium and how is it calculated?

A premium is the amount of money you pay for a policy.

When determining a premium, insurers consider many factors and use statistics and probabilities to determine the risk of insuring a particular risk and person.

The likelihood of claiming is considered and a premium for the insurer to take on the risk is determined.

Generally, when the risk of accident, loss, theft, or catastrophe is higher, so too are the premiums.

And when the risks are lower, the premiums are too.

How much does building insurance cost?

The cost of building insurance is based on the risk profile of the property and can vary wildly depending on various factors.

Your insurer will calculate the risk of damage or destruction to your property when determining a premium.

They will also consider a variety of factors, all of which can also affect your premium.

1. Location: Insurance premiums can be influenced by the location of your property, including its proximity to the coast, whether or not it is in a flood-prone area or an area prone to bushfires.
2. Property type: The type of property being insured (e.g., whether it’s a single-family home, apartment, commercial building etc.) and its construction materials, size, age, and condition can all impact insurance premiums.
3. The sum insured: The sum insured, or the maximum amount the insurance policy will pay out in the event of a claim, can affect the cost of building insurance. Higher coverage limits generally result in higher premiums.
4. Level of coverage: The extent of coverage and the specific risks covered by the policy can also influence the cost. For example, policies that include coverage for a broader range of perils may have higher premiums.
5. Claims history: As with any insurance type, the claims history plays an important role and can affect future insurance premiums. Properties with a history of frequent claims will probably face higher premiums.
6. Security measures: Security features such as alarm systems, deadbolts, and security cameras may result in a discounted insurance premium.
7. Insurance provider: Different insurance companies may offer varying premiums for similar coverage.

How do I work out how much to insure my property for?

Properties are very diverse in size and style, as are the locations in which they’re built and the requirements of each customer.

So given no two policies are the same, it’s vital to accurately calculate how much cover you need to ensure your property is appropriately protected.

Failure to do so could see you underinsured.

So, when looking at building insurance, you’ll need to determine how much it would cost to completely replace or build your property.

Many insurance companies offer online calculators or tools to help estimate rebuilding costs based on factors such as location, property size, and construction type.

These tools can provide a rough estimate to guide your decision-making process.

One way to do this is to evaluate the rebuilding costs, including the cost of materials, labour and any other additional expenses.

You’ll need to include external structures such as garages, swimming pools or fences, and account for inflation given the cost of materials and labour increases over time.

Another way to make the calculation is by using a cost-per-square-metre calculation to rebuild based on the size of the property.

Whichever you decide to use, by carefully assessing the rebuild cost of your property and considering various factors that may influence the cost, you can determine the appropriate amount of insurance coverage needed to adequately protect your home and assets in the event of damage or loss.

Can I reduce the cost of my building insurance?

One key way to pay less for building insurance is to compare insurance companies.

And once you have your insurance, make sure you shop around for quotes from elsewhere before renewing.

Another way to save is to choose a higher excess and lower premiums.

Ok great, but if building insurance isn’t essential, do I really need it?

As I explained, all Australian home loan lenders require borrowers to take out home insurance as a condition of formally approving the loan.

And for strata-titled properties, building insurance is included in your quarterly owner's corporation or body corporate fees so owners just need to ensure they have adequate cover for their property's contents.

If you manage to fall into the other category whereby you can choose to get building insurance or not, whether or not you do so depends on several factors, including your individual circumstances, your financial situation, and any legal requirements or obligations.

Generally, even though it's not a legal requirement, it's still advisable to consider insurance to protect your investment and assets from unexpected events such as fire, storm damage, or vandalism.

You’ll also want to consider your ability to absorb the financial impact of rebuilding or repairing your property in the event of a disaster - building insurance provides financial protection and can help mitigate the costs associated with rebuilding or repairing your home.

The location of your property can also influence the importance of building insurance.

Properties in high-risk areas may require more comprehensive coverage to protect against potential risks.

A final note…

Ultimately, the decision to purchase building insurance should be based on your individual circumstances, risk tolerance, and financial considerations.

It's advisable to carefully assess your situation and consider getting advice about the most appropriate cover for your property.

After all, life is unpredictable and unforeseen circumstances can quickly put you under financial stress (or even ruin) if you’re not properly prepared.

About Adam Hubbard Adam Hubbard is a senior Wealth Strategist at Metropole and his many years of real estate and wealth creation experience gives him a holistic perspective with which he helps his clients safely grow their wealth through property.