Home Insurance and Being Underinsured

• 

  deme on 17/04/2023 - 20:15

  +1

  Can someone explain why this happened?

  $310,000+$190,000 = $500,000

  They chose to insure their house for $500k instead of what was needed to rebuild it.
  What's odd though is Westpac had a valuation but didn't advise them

  Seriously go check your own insurance policy right now.

  • 

    AustriaBargain on 17/04/2023 - 22:50

    Cor, how much does it cost to clear a lot of rubble, plant a garden, and build a house? 815k I suppose. But wow you'd think they would have checked they were fully insured.

    • 

      geekcohen on 18/04/2023 - 06:28

      how much does it cost to clear a lot of rubble, plant a garden, and build a house?

      What about the contents and everything else inside it?

      I wouldn't have thought the garden would be included??? Just the building structures (IE - House + External Garage if applicable etc).

      But wow you'd think they would have checked they were fully insured.

      I think a lot of people make an assumption that insurance is insurance and that you don't need to review the value etc or the amount you are insured for.

• 

  Gunnar on 17/04/2023 - 20:19

  +1

  One of the best bits of advice my broker gave me was to always check that your policy to rebuild and cover your contents to ensure you can cover everything (including covering the cost of demolition and carting away rubbish). Then make sure you know the limits of what you can claim under your content categories and amend your policies accordingly

  • 

    dudebargain on 17/04/2023 - 20:31

    My question is why is the insurer putting some part of the payout into the mortgage? Shouldn't that go to the couple so they can rebuild?

    Let's say I am insured for 700K. My house burns down. The cost to rebuild is around 700K so it is fine. But the insurer can then give some part of the payout into my mortgage thus leaving me out of pocket to rebuild?

    • 

      Tricon on 17/04/2023 - 20:57

      +6

      You will find that the insurer is listed on the mortgage as having an interest. The mortgagee is paid first. The loan is more important than anything else (according to the mortgagee).

      • 

        dudebargain on 17/04/2023 - 21:12

        Right. So if my loan amount is 500k and my house burns down, insurer pays 500k to the bank and loan is paid off. And I get 200K and own the land?

        Demolition and removal will cost at least 100k.

        So I actually now have 100K in the bank.

        Is that how most home insurance works?

        • 

          SmiTTy on 17/04/2023 - 21:30

          @dudebargain: I think the idea is if your house burns down, the value of your property might not be worth the loan amount anymore (because there's no house on it). To mitigate that risk, they want to be paid first.

          Yes you could argue the land value has appreciated and the LVR is still very healthy, but that would be different for every case. Without having to assess each case differently, I suppose they just have the payout to them

          Usually when you take out a mortgage, they will ask for the certificate of insurance and the bank is named on the insurance.

          What you could do, is go out and get another loan to rebuild.

        • 

          bargaino on 17/04/2023 - 21:42

          @dudebargain:

          Demolition and removal will cost at least 100k.

          That much? Your home insurance valuation is supposed to cover the cost of demolition and rebuilding.
          So you insure for say $600k, if rebuild cost is $500k.

          You will need to refinance, even if you are rebuilding on the same site. If your mortage debt was more than the insurance amount, that just means your home equity was less than the land value. So of course you still owe money.

• 

  Some Human on 17/04/2023 - 20:27

  +2

  Mine gives you a choice of insure for x amount or insure for a total rebuild. I figured if the place burnt down, I could collect the x amount, sell the land and make rebuilding someone else's problem.

  • 

    JimmyF on 17/04/2023 - 20:32

    +2

    Which is what happen here. They now own the land outright, loan free with $190k in the bank. So they can sell the land and buy elsewhere, or build and take out a new loan to cover the shortfall. $500k will get you a good volume builder house these days.

    • 

      original15 on 17/04/2023 - 20:37

      +5

      assuming volume builder stays afloat

    • 

      dudebargain on 18/04/2023 - 09:48

      So if they were insured for 800K, then they would pocket 500K and 300K given to the bank to pay of the mortgage? Is that how it works?

      • 

        JimmyF on 18/04/2023 - 19:15

        Basically, assuming the insurance views the existing house worth $800k. Its not as simple as you are insured for $800k so here is $800k. The place has to be worth it too.

        But assume they had $800k insurance and it was worth $800k, then it would be

        $800k insurance payout - $310k Owed on the loan = $490k payout

        They can then 'borrow' say $300k again to rebuild the $800k house and be back to starting position again.

  • 

    AustriaBargain on 17/04/2023 - 23:35

    I think that's a pretty common dream for house owners. I have people casually tell me they pull "insurance jobs" on their cars and laptops. Never had anyone admit to me they burned down their house for the insurance money.

    • 

      ihbh on 18/04/2023 - 11:39

      Imagine it doesn't work. You lose your house and you go to jail. Awesome.

• 

  brendanm on 17/04/2023 - 20:35

  Did someone hide the insurance documents from them?

• 

  Euphemistic on 17/04/2023 - 21:58

  +8

  They have only received $190,000 of their insurance payout. The rest was put straight on the mortgage.

  That sounds reasonable. Discharge the mortgage on the house because it’s gone. But then you should be able to reapply for finance against the new build.

• 

  screensaver on 18/04/2023 - 02:37

  I have seen land for sale with burnt houses on it around Taree. You can sell the land with a damaged house to save that 100k

• 

  holdenmg on 18/04/2023 - 02:49

  Nobody wants to over-insure (but plenty are under-insured).

  The problem is in the "but Westpac only insured it for $500,000" making it sound like Westpac made an error.

  Surely the Insurance Proposal and Policy Document will name those Proposing the Cover, the Sum Insured and others with a material interest such as a Mortgage.

  The Sum Insured, (low) Premium should have been been big clues.

  I wonder if they were induced to use Westpac's policy as opposed to shopping around for full and adequate cover?

• 

  djkelly69 on 18/04/2023 - 07:51

  The owner takes out the insurance, not the bank.

  In my experience the bank will tell you that it needs to be insured for a minimum of $xxx, which comes straight off the valuation (as part of the valuation indicates the amount it should be insured for).

  It is surprising the bank even lent them the money without the minimum level of insurance, as it is always a pre-condition to advancing on a loan that satisfactory insurance is taken out.

• 

  GourmetFoodie on 18/04/2023 - 08:59

  -1

  The mother of stupid is always pregnant…

• 

  Malik Nasser on 18/04/2023 - 09:55

  Ultimately it is the owners responsibility to ensure the house is adequately insured (it is in their best interest).
  In saying that, you would expect Wespac to be aware of that and inform the owners that they were underinsured (which they may well have done, but who reads those pesky letters anyway).
  To me it sounds strange that the insurance will pay down the loan, as I would have thought it should be used for rebuilding. However in thinking it through, the bank will want to ensure they are protected, so may have something in either the original loan (mortgage) documents, or otherwise in the insurance documents to ensure they are not left holding the bag.
  If the insurance money is paid directly to the owners, and they decided the outstanding mortgage is far larger than the now devalued property, they may decide to do a runner with the $500K. I think this is an unlikely scenario, but the banks will want to protect themselves from this.

• 

  ihbh on 18/04/2023 - 11:48

  Bogans trying to get bank/insurer to pay them more and taking no personal responsibility.