Understanding the difference between sum insured and agreed value insurance policies is crucial for property investors and landlords. These two types of policies determine how much you'll receive in the event of a claim, affecting your financial recovery and investment protection.
Under a sum insured policy, the insurer pays the lesser of the market value or the sum insured amount at the time of a claim. This means the payout can fluctuate based on current market conditions. The sum insured is typically the maximum amount the insurer will pay, which is determined at the start of the policy. If property values decrease, you may receive less than anticipated, potentially impacting your ability to replace or repair your asset.
An agreed value policy pays out a pre-determined amount agreed upon by the insurer and policyholder at the policy's inception. This amount remains fixed regardless of market fluctuations. Such policies often come with higher premiums due to the certainty they provide, but they ensure you receive the full agreed amount, offering peace of mind and financial stability.
To see how this plays out in practice, consider a scenario where you own a 3-bedroom house in Melbourne valued at $800,000. With a sum insured policy, if the market dips and the property's value drops to $750,000, your payout is limited to the lower amount. Conversely, with an agreed value policy set at $800,000, you receive the full amount regardless of the market.
In our experience reviewing thousands of properties across Australia, we find that many investors underestimate the impact of market fluctuations, leading to underinsurance with sum insured policies. Investors often overlook the benefits of agreed value policies, especially in volatile markets. It's also common to misjudge the replacement cost of properties, which can leave gaps in coverage.
The answer can differ depending on your situation. For properties acquired after significant renovations, an agreed value policy might better reflect the true value post-renovation. Investors in rapidly appreciating areas might favour sum insured policies to potentially benefit from rising values. Those with highly customised properties may find agreed value policies more suitable due to the difficulty in assessing market value.
Getting professional advice is critical as insurance needs are highly individualised. A Chartered Quantity Surveyor can provide an accurate assessment of your property's value, while an insurance broker can guide you on the best type of policy to suit your financial strategy and risk tolerance.