Recent bushfires and floods have shown not only how little homeowners know about their insurance coverage, but also how uninformed they are about underinsurance.

Last October’s Blue Mountains bushfires highlight a serious problem with the way residents in fire-prone areas get information on the amount of cover they need.

The national building code was amended in 2010, after the Victorian Black Saturday fires in 2009, to put bushfire attack level (BAL) ratings on properties in at-risk areas, imposing requirements on design and materials used.

But many Blue Mountains residents were unaware of the changes and have found themselves underinsured for regulations that can add more than $100,000 to their cost of rebuilding.

Legal Aid NSW says it’s not a case of homeowners deliberately underinsuring to save money.

The service says insurers should be required to give customers key information when policies are bought, such as whether homes are in flame zones.

Blue Mountains City Council (BMCC) wants the Federal Government to address the matter nationally, or legislate for the insurance industry to inform people so they can cover adequately.

But the Insurance Council of Australia (ICA) says it’s up to councils to tell residents about changes, and insurers don’t have that level of detail.

The BMCC says it doesn’t have the information either. A bushfire attack level rating is not decided by postcode.

A council spokesman told insuranceNEWS.com.au the authority is required to map land the NSW Rural Fire Service has designated bushfire-prone, and it publishes the map online.

“However, the bushfire attack level rating of a property is more complex and is specific to the property and the building.

“The rating needs to be determined on a case-by-case basis and it is not possible to provide property owners with their BAL rating on a rates notice or property certificate.”

The fire service publishes information to help determine ratings, and Fire Protection Association Australia accredits bushfire consultants who provide BAL certificates for a fee.

The BMCC charges $300 to provide a BAL certificate.

The information is there for those who seek it, but as the 2011 floods showed, most consumers don’t know what risk data is available or where to find it.

Legal Aid NSW surveyed 120 Blue Mountains residents after the fires, and found that 91% did not consider extra rebuilding costs when deciding on their sum insured, and 79% had not heard of BAL ratings.

Of 68 respondents who suffered total loss, 46 were underinsured for rebuilding. About 71% of all underinsured respondents were unaware of the cost of rebuilding, while only 7% cited insurance affordability.

“Some clients have been told by builders and architects that the estimated cost of meeting these additional building requirements due to high BAL ratings could be up to $100,000 to $150,000,” Legal Aid NSW has told the Productivity Commission inquiry into disaster funding.

ICA says the NSW Rural Fire Service has provided a statewide dataset for bushfire-prone land for insurers to consider.

It agrees the Blue Mountains fires have drawn attention to underinsurance, and says insurers generally provided cash settlements to the full extent of the policy.

“Insurers do not determine the level of cover each customer may require and are legally not able to provide this kind of financial advice,” an ICA spokesman told insuranceNEWS.com.au.

She says it should be up to consumers to choose how much insurance they want, or can afford.

“Insurers believe the responsibility and authority for informing ratepayers about changes to bushfire-prone land zonings and council development controls, and the impact this might have on building costs, falls to local governments.

“Insurers do not design and implement development controls, nor determine how building codes and any changes should apply to individual properties. These decisions are made by local governments.”

About 1745 claims arose from the Blue Mountains fires, with $183.5 million in reserved losses. Some 98% of claims have been closed, with the remainder open while the policyholders decide whether to rebuild.

The BMCC has asked the Australian Prudential Regulation Authority to review and strengthen insurers’ obligations to policyholders in fire-prone areas.

Mayor Mark Greenhill told insuranceNEWS.com.au the council continues to advocate for adequate insurance cover.

He says ICA and its members are trying to deflect responsibility to local government and have known about raised building standards since the 2009 Victorian fires, the Warrumbungle fires in NSW and the Tasmanian fires, “all of which occurred before last October”.

“They should have told people so that they had the option of adjusting their insurance cover.”