Underinsurance: Should building cost calculators be scrapped?

Are brokers fulfilling their duty of care?

He said insurance brokers have a duty of care to ensure customers are getting accurate estimates of their property rebuilding costs and premiums. Currently, he said, when a customer asks their broker what amount they should insure their property for, the broker will often pass the buck.

“The insurance broker says, ‘We don’t know, it’s not our job. You’ll need to work that out yourself,’” he said.

Sadlier said the broker may suggest speaking to a valuer or using an online cost calculator but implied they should be recommending a quantity surveyor.

“Our pitch is that we’re protecting brokers from a duty of care because they’re telling customers to go and use this [calculators and valuers] and it’s inaccurate,” he said. “This in time is going to come back to them [brokers].”

He said some studies have found that the cost estimates of online building insurance calculators can be out by more than 100%. Sadlier said the problem with valuers is they don’t stand by the accuracy of their reports.

“If you read a valuer’s report, they all have disclaimers in them saying, ‘We can’t stand by these costs, you should engage a quantity surveyor,’” he said. “They all say so, but they’re still taking a fee for it.”

Sadlier said he reviewed three valuers’ reports last week.

“There’s only one profession in the world that actually assesses construction costs and that’s a quantity surveyor,” he said.

The insurance industry’s reliance on online building cost calculators

Sadlier said the only industry that doesn’t use quantity surveyors as the standard, go to source for calculating property costs, is the insurance industry.

“If a builder wants to put a tender in to build something, they don’t use a valuer to come up with what the construction costs will be,” he said. “A bank also doesn’t use a valuer, or a developer wanting to select a builder – and none of them use cost calculators.”

To support his argument, Sadlier referred to consumer complaints received by AFCA (Australian Financial Complaints Authority) from underinsured property owners involved in insurance claims.

“The claimant’s issue is the insurance broker didn’t tell them where they should go [to get an accurate estimate],” he said. “They [the broker] didn’t tell them they were underinsured, and they assumed it was an appropriate amount.”

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Current economic conditions, he said, are compounding the issue.

“Yes, it’s getting worse because of the current market,” he said. “We’ve seen construction costs go up 20% over the over the last 18 months.”

He also said nearly 4,000 companies in Australia have gone into liquidation during the last year. Nearly 30% of them were builders or construction firms.

The pressures of rising costs and stretched supply chains have come at a time when natural disasters, like the recent floods, have created even more demand for new houses and repairs. However, most builders don’t have the staff or economies of scale to deal with the demand.

Meanwhile, he said, there’s a construction boom in the US where building approvals are up 25% on last year, the biggest rise since the financial crisis in 2009. The result is Australian companies are having a very tough time competing for supplies from China, the source of most construction materials.

Sadlier said a framing and trussing company he works with could have tripled their orders and doubled their workforce, but they couldn’t source enough timber. If Australian companies can source supplies from China, he said, shipping containers cost four times as much as they did a few years ago.

Sadlier said these economic pressures are making Australia’s underinsurance problem even more urgent.

“A property that was insured correctly last year, it’s underinsured by a long way now,” he said. “That’s not to discount the ones that were underinsured last year and now are even further underinsured.”

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An article on the ICA website says: “Web calculators that reference current building and replacement costs play an important part in helping you decide the sum-insured.”

The article says many insurance companies provide access to web calculators and provide their own link to a Cordell Sum Sure calculator. However, beneath the link, the ICA warns against relying on the result.

“The results from this calculator are an approximate guide only and should not be taken as advice or a recommendation to acquire any product or level of insurance cover,” it says.

Further down in this disclaimer, the ICA says: “Please check with an architect, builder, quantity surveyor, valuer or other suitably qualified professional for an accurate estimate.”