How under-insuring your property could bankrupt you


Expert Advice by Paul Wilson

When you start out as a property investor, you generally run through a list of worst-case scenarios in your head: What if I can’t find a tenant? What if the tenant does a runner? What if they set the house on fire?
Well, I’m sorry to say that one of those events actually happened to me. One of my investment properties had a major fire in 2012. It was caused by an innocent mistake by a three-year-old, who turned on a radiant heater just before the family left the house to go shopping. There was a dry basket of clean washing next to the heater; it caught fire and it didn’t take long for the rest of the house to go up in flames.
Nobody was hurt or home at the time, thank goodness, but my tenants lost virtually all of their possessions. Their own personal contents insurance covered their own losses, but as the landlord, I was in the difficult position of having to rebuild the house, with no tenants in place to generate any rental income.
I consider myself one of the lucky ones: My insurance policy ultimately paid out handsomely, so I wasn’t out of a pocket more than a few hundred dollars for my excess.
I have unfortunately known of investors who have been in similar situations and because they were underinsured, they only had a percentage of the reconstruction costs covered. They found themselves having to foot repair bills worth tens of thousands of dollars, sometimes hundreds of thousands, which just goes to show that the wrong insurance policy has the power to bankrupt you.
Thankfully, I had a good building and landlords insurance policy, so my story has a happy ending. My insurance was fantastic; I was covered for full rent payments during the whole reconstruction period and I ended up with a brand new home (complete with fresh depreciation benefits) on completion.
However, it wasn’t an easy process. The insurance company – or, more to the point, the builders that the insurance company appointed – took forever and did a substandard job initially, despite being paid a significant amount to do the repair. 
We later discovered that the building company had actually employed contractors to do the job – work that was largely unsupervised by the building company. They did themselves a massive disservice, because their substandard contractors did such a poor job (and dragged the project out so much longer than it was scheduled to take), that they had to re-do a lot of work at their own expense.
Eventually, the job was completed thoroughly and to a quality standard, but it took a lot of communication with the builders and insurance company, together with a hands-on approach, to achieve that outcome.
Even though the property was located interstate, I found myself being involved almost to the point of becoming project manager, together with my awesome property manager who also kept an eye on things. It was exhausting at times, but I honestly believe that if I hadn't kept that relationship open and communicated regularly with the builder and insurance assessor, there would have been plenty of items either overlooked and not attended to during the rebuild. 
The moral of the story: You get what you pay for when it comes to insurance. When you under-insure, it’s like gambling and when the stakes are this high, it doesn’t make sense to scrimp and save on a substandard policy.

Paul Wilson is an Independent Property Investing Expert and the founder of We Find Houses, Educating Property Investors & We Find Finance. Paul has been educating and coaching investors since 2001. Paul provides valuable, independent guidance and support by teaching strategies on how you can invest successfully while protecting yourself from commission hungry sales agents and property spruikers. Protect yourself with knowledge, contact Paul today for a complimentary consultation on 1800 600 890 or email

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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.

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  • Max P says on 08/04/2014 05:43:24 PM

    Great article Paul. I learned how under insurance can effect you the hard way! It is also a good idea to have cover for "Claims Preparation" especially if there is a substantial Real Estate Holding so that you have an assessor effectively working on your side when you make a claim (especially a large one).