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Are you underinsured?

Property insurance and depreciation

The Banking Royal Commission’s probe into the insurance sector brought to light widespread misconduct and breaches of the Insurance Code of Practice.

One issue that was raised was underinsurance, where policyholders were led to believe that their policies covered the full replacement of their properties but discovered their cover fell short when they made a claim.

Alarmingly, research from Insurance Australia Group Limited has found that one in twenty Australian homes are not insured and up to 30,000 home owners fail to renew every year.

An Insurance Council of Australia survey also found 83 per cent of Australians are underinsured for home and contents. For property investors, this means facing considerable losses and risking financial hardship in the case of major tenant damage or a natural disaster.

It’s more important than ever to know the true replacement cost of your property and assets contained to ensure you are adequately covered.

While you may have known the replacement value of your property some time ago, construction costs fluctuate. This means your current insured value is easily outdated, putting you at risk of underinsurance.

An overinsured property can also lead to owners outlaying more money on higher premiums that provide unnecessary cover.

83 per cent of Australians are underinsured for home and contents.

In the case of damage, investment property owners may be entitled to claim additional tax deductions on the building structure and contained assets.

If the owner receives an insurance payout, a balancing adjustment will need to be calculated for destroyed assets.

The balancing adjustment is determined by comparing the asset’s termination value with its adjustable value at the time it was destroyed. The termination value is the amount received for the asset such as from the insurance payout while the adjustable value is the purchase cost of the asset minus its decline in value.

If the asset was used solely for income-producing purposes and the termination value is greater than the adjustable value, you must include the excess in your assessable income. If the termination value is less than the adjustable value, the difference is an allowable deduction.

In circumstances where no insurance claim is lodged, owners can claim the total undeducted value for assets removed and scrapped from within the property.

Often, there are still thousands of dollars of depreciable value left in destroyed assets which can be claimed immediately by property investors. It’s important to contact a specialist Quantity Surveyor if assets are damaged as a site inspection may be required to determine replacement values.

The Royal Commission highlighted the importance of accuracy when it comes to property replacement costs and adequate insurance. Quantity Surveyors have the required skills to estimate construction replacement costs.

For more information on replacement costs, contact the expert team at BMT Insurance or call 1300 268 467 today.