A man whose home was totally destroyed by fire has lost his effort to reclaim the full sum of $740,250 he insured the house for.

The Australian Financial Complaints Authority (AFCA) said it was up to the homeowner to set the sum insured and make sure the building was not over insured.

While the man’s home was totally destroyed by the fire, the sum insured exceeded the cost of reinstating the building.

“This determination is substantially in favour of the insurer,” AFCA said. “The complainant is not entitled to payment of the full sum insured as this is not required by the terms of the policy.”

The man lodged a claim under his Home Building Insurance policy held with IAG after the home was destroyed by fire.

IAG accepted the man’s claim for fire damage and agreed to authorise repairs, or give a cash settlement, based on a builder quote of $352,885.38. It later offered a total cash settlement of $412,623.81, allowing a buffer of 10% for contingencies, to resolve the complaint.

The homeowner appealed to AFCA, saying he should receive payment of the full $740,250 as the building was a total loss.

AFCA determined IAG could elect to pay the reasonable cost of repair or rebuild and was only required to pay the full sum insured should rebuilding costs reach or exceed that amount.

The product disclosure statement (PDS) said IAG would settle the buildings claim by arranging rebuild of the home, paying the “reasonable cost” to repair or rebuild the home, or paying the building sum insured “when we consider your home to be a total loss or when we choose to do so”.

AFCA said its panel of an ombudsman, a consumer representative and an industry representative was satisfied that IAG was “entitled to exercise its discretion to pay the man the reasonable cost of the rebuild rather than the full sum insured in the circumstances of this claim”.

“The insurer is not required to pay the sum insured just because an insured event has occurred requiring the home to be rebuilt.”

AFCA determined IAG’s cash settlement offered should be raised marginally, to $431,379.43, to allow for enclosed verandas, a toilet and a bedroom instead of a dining room which were not in the original rebuild quotes.

“The panel regards this as fair and reasonable in the circumstances of this complaint,” AFCA said.

See the full ruling here.