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By Leanne Jopson
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Insurance loopholes and challenges to avoid this bushfire season

As Aussie prepare for the upcoming bushfire season, what do insurance policyholders need to know to protect their interests?

Insurance expert, Professor Michael Sherris from the School of Risk and Actuarial Studies at UNSW Business School said that bushfires are becoming more prevalent with increased temperatures.

He further said:

"This is something that is going to be more significant over the coming years.

We know that it is going to be hotter, and drier, and bushfires will unfortunately become more common.

Fire damage is normally included in home insurance but it’s important to know what you are covered for, and if your home insurance is up-to-date and reflects the cost of a new rebuild.

While most insurance companies should pay out, there are some issues and challenges that result in policyholders being underinsured or not insured at all."

Bushfire3

Does the property adhere to newly revised building codes?

Revised building codes, adapted after previous bushfires, can lead to insufficient insurance coverage for policyholders.

Building codes are rules set by authorities at different levels (local, state, or national) that define the basic standards for building design, construction, and safety.

These codes can evolve to include updated fire safety measures.

Prof. Sherris said that building codes were revised after the black summer bushfire event and, depending on the risk level of the property, this impacts the cost of replacement.

If your home doesn't meet the new building codes, your insurance company will only compensate you based on the value of your existing structure.

They won't cover the expense of rebuilding to meet the updated codes.

Prof. Sherris further explained:

"If your home’s cladding material, for instance, does not meet the building code requirements in your area, and in the unfortunate event of a bushfire causing damage to your home, necessitating a rebuild with cladding material compliant with the building code, you will incur higher costs.

Your insurance company, in this situation, will typically not cover the higher cost.

It is the same if you renovate parts of your property to the new building codes.

Your property is valued higher because it is more resilient to bushfires.

Unless your insurance company is aware of this and reassesses your insurance premium based on your new building codes, you will be underinsured."

What should policyholders do?

Policyholders need to check what building codes their property needs to comply with, based on their specific geographic area.

Prof. Sherris commented:

“Homes are being built to a much higher standard as a result of previous bushfires and homes being burnt down.

If you live in a high bushfire risk area, then your building code may have changed since the black summer bushfires.

Insurance companies may not notify policyholders of the changed building codes, but it’s good to discuss these points with insurance companies.

Insurance companies should ensure that their policyholders are aware of the impact of building codes on insured values, and you may need to reassess your insurance premium to cover higher costs.

It may mean you might end up paying a higher price, but you will be covered for the upcoming bushfire season.”

He also advises policyholders to consider insurance plans that automatically increase by 30% in price when making a claim.

These policies cost more, but they provide better coverage, matching the actual replacement cost.

Property Insurance

Is home insurance becoming too expensive?

“A major challenge we see nowadays is Australians choosing not to have insurance because the cost may be considered too high,” says Prof. Sherris. “The current cost-of-living crisis is not helping.”

Insurance companies QBE and Suncorp predict that home insurance rates will go up by 10% due to more natural disasters causing insurance claims.

Every home insurance policy includes protection for bushfires, and the cost you pay is linked to the bushfire risk, often determined by the BAL (bushfire attack level) of the property.

Prof. Sherris noted:

"As bushfires are becoming more prevalent, the BAL for properties is becoming higher, which results in higher home insurance costs.

This is a factor that insurance companies use to assess home insurance.

It’s critical for homeowners to ensure they have home insurance that protects them from bushfire damage especially if they live in a high-risk area.

Homeowners may think that their property will be undamaged but may not be aware of the expected outlook this upcoming season."

The Australian Disaster Resilience Knowledge Hub reported that 2,488 homes were destroyed during the 2020 Australian black summer bushfires.

In the 2009 Victorian bushfires, over 2,000 homes were lost.

According to the 2023 AFAC seasonal outlook report, the upcoming bushfire season in NSW is anticipated to have a higher fire risk compared to previous years.

High Risk Areas With Sydney

Finally, Prof. Sherris said:

"What we have seen in the US, for example, is that insurance companies have pulled out of providing insurance for areas where bushfire or other natural disaster risk is too high as it would be too large of a financial uncertainty to cover certain areas.

It’s a worrying factor that may also become prevalent in Australia.

There is an unexpected void as to what will happen if insurance companies pull out of high-risk areas.”

About Leanne Jopson Leanne is National Director of Property Management at Metropole and a Property Professional in every sense of the word. With 20 years' experience in real estate, Leanne brings a wealth of knowledge and experience to maximise returns and minimise stress for their clients.
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