This month, we had the pleasure of interviewing Phil Hughes, an insurance broker from Adapt Risk Solutions, to gain his perspective on the importance of adequate insurance coverage. During our conversation, Phil debunks common myths, highlights the often-overlooked risks, and shares insightful case studies demonstrating underinsurance's real-life consequences. We are excited to share his valuable insights with you.
The Importance of Adequate Insurance: Insights from Phil Hughes of Adapt Risk Solutions
Why is adequate insurance coverage crucial for individuals and businesses?
Adequate insurance is crucial for individuals and business owners because it allows you to transfer the risk of financial loss of unforeseen events to the insurer, providing financial protection should an insurable event occur. It supports business continuity during unexpected events, and without it, individuals and businesses may face crippling financial losses that they may otherwise struggle to recover from.
What common risks do people often overlook when choosing insurance policies?
There are all sorts of nuances to look for with every policy type – as such, it is very important to work with an insurance intermediary that specialises in the insurance cover you are looking for, e.g. a broker specialising in the property when insuring a commercial property or a professional indemnity insurance specialist for an engineering consultant. Generally, underinsurance is a commonly overlooked risk: not purchasing an adequate limit of insurance or including a particular cover that is appropriate for the risk. A specialist broker will be best placed to guide you through these pitfalls and ensure you have tailored insurance solutions for your particular circumstance.
Can you share a case where adequate insurance saved a client from significant financial loss?
Absolutely, we’ve experienced many such cases. We recently had a client who experienced a major storm loss. Luckily, we advised them to get an insurance replacement valuation just before the event. The valuation revealed the building was underinsured by half of its replacement value, which could have led to the insurer only partially paying out 50% of the claim due to the co-insurance clause. Because the coverage was adjusted in time, the client received full compensation, avoiding a potential financial disaster.
Debunking a Common Insurance Myth
What is the most common myth about insurance you encounter?
One myth we often hear is that “insurance is dead money!” In reality, we have experienced and managed enough major insurance claims to see firsthand how insurance can save a business from ruin. It’s one of the most important financial contracts a business owner can have, and it is worth every cent when the policy responds as intended.
How does this myth affect people's insurance decisions?
Many people base their decision purely on cost, opting for the cheapest policy without considering the consequences. But in reality, a cheap policy might not offer adequate protection. It could be money spent on little more than a piece of paper if the coverage doesn’t address the specific risks they face.
Choosing the Right Coverage
What factors should people consider to ensure they have adequate coverage?
For commercial property insurance, the Building Sum Insured should reflect the true replacement value of your property. We recommend carrying out an insurance replacement valuation every 3-4 years. However, with the current volatility in construction costs, this now needs to be assessed more regularly to ensure coverage remains accurate. Also, review your policy's Loss of Rent limit to ensure it covers the actual rent and outgoings you receive. Finally, we suggest setting the Indemnity Period - the time it takes to rebuild or repair - to at least 24 months so you continue to receive rental income for this period in case of a major loss.
Strata Buildings Insurance
What are the unique challenges and considerations when insuring strata buildings?
Strata buildings present unique challenges due to their complex ownership structures. The insured party is the Council of Owners, but each individual owner is still entitled to access the policy and make a claim. Policies need to cover common areas like hallways, elevators, and recreational facilities, which may require additional coverage and increase liability risk due to shared facilities. Each strata also has its own unique set of bylaws, which can impact how the policy responds, or who is responsible for applicable policy excesses.
Can you provide an example where adequate strata insurance made a significant difference for property owners?
A good example is floating floor coverage (tongue-and-groove or laminated wood floors), which is often an optional add-on with most insurers. We've seen this come into play in many claims and strongly recommend adding it to relevant policies. For example, if a burst pipe damages part of a floating floor that can't be matched or is no longer available, you might need to replace the entire floor, which could cost tens of thousands of dollars. Considering the relatively low cost of adding this coverage to your policy, it's a wise choice to protect against this common claim scenario.
In strata communities, the diverse mix of personalities and needs can sometimes lead to situations where a Council of Owners' decision negatively impacts a resident. These situations can lead to legal disputes. This is where a strata policy's Office Bearers Liability section becomes invaluable, as it covers legal defence costs in these scenarios, which can easily run into tens of thousands of dollars. We strongly recommend including this often-overlooked coverage, which, with some insurers, can also extend to strata managers. It is important to make sure that the coverage limit is suitable for the size and complexity of the strata to safeguard all involved parties.
Role of an Insurance Broker
How does an insurance broker help clients understand and obtain adequate coverage?
Firstly, it’s essential that an insurance broker fully understands your operations; then, they can successfully identify your specific needs and risk exposures to recommend the right coverage. Insurance brokers can explain how a policy may or may not respond to a particular situation, compare options from different insurers, and provide you with enough information so that you can make an informed decision. Brokers also offer advice on risk management and guide you step by step through the claims process.
Making sure your property or business is adequately insured isn’t just about ticking boxes—it’s about safeguarding your future. As Phil Hughes highlighted, having the right coverage can be the difference between bouncing back from a disaster or facing serious financial loss. We recommend taking the time to review your insurance regularly and working with specialists who can help you stay adequately protected so you're ready for whatever comes your way.
This left apartment owners with a daunting task - raising an additional $4M to restore their property to its former state.
It is also worth noting that this case study regarding underinsurance can apply to all types of properties in Australia. Moreover, it is dangerous to adopt escalations each year as these may not have kept up with actual building cost increases. It is anticipated that the rebuilding required in these storm-affected areas will put further pressure on construction costs. Further, this pressure and demand for reconstruction is expected to flow into the broader construction industry which is already under cost pressures.
This case study highlights critical lessons about ensuring adequate insurance, especially amidst increasing severe weather conditions and volatile construction costs. Find out more about how the Acumentis team can assist with an Insurance Valuation, outlining an accurate replacement cost for your property.