What is building insurance and what does it cover?

Canstar spoke to Hugo Schreuder, the CEO of insurer Youi, and asked him to explain what building insurance covers and how you may be able to save on your premiums. Here’s what he had to say.

What is building insurance?

Our homes and investment properties are most often our biggest asset, so it makes sense to want to protect them. Building insurance, also referred to as ‘home only insurance’ does just that by helping to cover the costs of replacing your property if it’s destroyed, or the cost of repairing damage to the physical structure of your property. It typically extends to permanent fixtures and fittings such as fitted kitchens, garages, fences and sheds.

What does building insurance cover?

While building cover varies slightly between insurers, it generally covers damage caused to an insured property from a wide variety of events including fire, certain kinds of flooding, storm, impact (such as by a car or falling tree), explosion, riot, vandalism and earthquake.

Some, especially comprehensive building insurance policies may also cover costs such as legal liability – which are the costs to compensate someone if, for example, they are injured on your property – 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.

When selecting a policy, it can be wise for consumers to consider what really matters to them. For example, if you’re concerned about damage caused by destructive summer storms or bushfires, it could be worth making sure the policy you’re considering fully protects you from these risks.

Do I need building insurance?

Most Australian home loan lenders require customers 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 can still be vitally important to insure your property as it’s generally a person’s largest and most important asset.

When considering how much to insure your home for, (the sum insured) it’s important to remember the cost you paid for your house and the cost to rebuild it are not the same. The main value of a home is the land, while building insurance covers the materials and labour needed to completely rebuild the property.

The sum insured should allow for the total cost of re-building, including replacement of all fixtures, fittings and structural improvements at the premises, but should exclude the value of the land.

Some insurers allow people the option to select ‘total replacement cover’ rather than the sum insured, which covers the market value of rebuilding your home, whereas sum insured makes it your responsibility to determine the cost to rebuild.

If you are buying a strata title apartment, you typically will not need to purchase building insurance as it will be covered by residential strata insurance. The cost of this cover is usually included in your building levies. However, you may still want to take out contents insurance to cover your belongings and any items that the strata insurance doesn’t cover.

How much does building insurance cost?

The cost of building insurance is largely based on risk, so your insurer will calculate the risk of damage or destruction to your property when determining a premium. For example, if your property is in a flood-prone area or an area with high crime rates, your premiums will likely be higher than those in safer areas.

The coronavirus pandemic has thrown up a perhaps unexpected demonstration of the of the impact of risk on premiums. We recently discovered that property crime rates have reduced across Australia because customers have been spending more time at home, so in July, Youi became one of the the first insurers in Australia to offer temporary coronavirus premium relief for eligible home insurance customers.

Other factors that may affect building insurance premiums can include characteristics of your property, such as its age, your claims history, whether you’re covering your property for building as well as contents insurance, how much you choose to cover your property for and whether you add any optional extras to your policy, such as buildings accidental damage.

How can you work out how much cover you need?

Not only are homes very diverse in size and style, so too are the locations in which they’re built and the requirements of each customer. As no two policies are the same, it’s vital to calculate how much cover you need to ensure you’re adequately protected.

According to the Insurance Council of Australia (ICA) underinsurance is common in Australia, leaving consumers at risk of not being able to rebuild their homes if disaster strikes.

To avoid this risk, those looking into building insurance, particularly sum insured policies, may want to take the time to determine how much it would cost to completely rebuild their property. There are online tools available to help with this and two common methods for estimating the cost. The first involves looking at the cost-per-square-metre to rebuild based on the size of the house. The second method is ‘elemental estimating’, which looks into finer details such as the quality of the build and design features such as whether the home is built on a slope.

How can you keep the cost down?

One of the best way to keep building insurance premiums down is to shop around. Don’t just pay your renewal without taking the time to get a few quotes from different insurers first, as you may be surprised by the savings you can make. Another cost saving method is considering having a higher excess and lower premiums, but remember this would mean you would need to pay more if you make a claim. Finally, you could take a look at what insurers are doing to support customers during Coronavirus.

This article was reviewed by our Sub-editor Tom Letts and Finance Editor Sean Callery before it was published, as part of our fact-checking process.

About Hugo Schreuder

Hugo is the founding CEO of one of Australia’s fast-growing general insurers, Youi. An accountant by trade, he began his insurance career in South Africa, before relocating with his wife and two children to officially open Youi’s doors on the Sunshine Coast in 2008. He has studied Accounting and Business Management at The Chartered Institute of Management Accounts, CIMA at Stellenbosch University and CA at Chartered Accountants Australia and NZ.