If your house insurance at least matches the market value of your home, you should be covered in the event of a disaster like fire, flood or earthquake – right? Well no, because the cost of replacing your home may
well be much higher than the sale value of your house.
Following the Canterbury earthquakes, New Zealand insurance companies moved to a sum insured regime, which essentially means that you specify what you want your insurance company to pay if your home is totally destroyed or badly damaged. The problem is that there is no guarantee that the sum insured will be sufficient to cover the costs of rebuilding your home.
Prosper’s Auckland Fire and General Manager, Stewart Wright, talks to the Insurance Council of New Zealand’s Operations Manager, Terry Jordan, about why so many Kiwi homeowners are at risk of under-insurance when it comes to their homes.
Should I base my insurance cover on the market value of my property?
“I would totally ignore the cost price, rating valuation and market valuation of a property because they are irrelevant – use them to choose your lotto numbers. They have nothing to do with the cost of replacing your property.”
What are the risks of total loss and what does it mean exactly?
“Here in New Zealand, a total loss would most likely be due to a volcanic eruption or earthquake – as we saw in Canterbury – and possibly a tsunami. Total loss from a flood, windstorm or tornado is less likely.”
What are Kiwis getting wrong when it comes to sum insured?
“Most homeowners are underestimating the extras they will be required to pay for in the event of total loss because people look purely at their house, and ignore things like outbuildings, fences, driveways, paths, decks and infrastructure services like sewerage, storm water drains and power.
“Our Canterbury experience tells us these additional factors add significantly to the overall cost. The homeowner is responsible for replacing anything from the house through to the boundary – and for some through the boundary to the middle of the road. The homeowner may well be liable for costs such as traffic control and digging up the road.”
Why are Kiwis getting it wrong?
“A lack of understanding about what has to be paid for in the event of a total loss is an issue. It’s also cheaper to go with the default sum insured put forward by the insurer when all the default sum was meant to be was a starting measure. And there’s the attitude of ‘it will never happen to me’.
“At this stage there has been no evidence of an underinsurance issue because there has been no total loss scenario since the sum insured regime began. Total loss through fire normally leaves things like the driveway, fences and foundations intact. But you just need to look at what happened to Christchurch to realise that total loss could happen to you – for a few dollars more, it isn’t worth the risk.
Does this mean that New Zealander’s need to move on from default sum insured?
“When insurers switched over to sum insured, they sent everybody a default sum insured. Effectively they said to everyone that ‘you must choose what you need to insure for, but here is a start’.
“That was five years ago when most insurers applied a rebuild cost of $2,000 per square metre and added on a bit for debris removal. A large percentage of people accepted that default, but it is important that they take the next step and establish accurately what level of cover they need.
“If you haven’t moved beyond default sum insured, then it is time for you to take a serious look.”
What steps should New Zealand homeowners take to make sure they are properly insured?
“There is an ascending scale of actions you could take
“Step One: Accept or remain with the default sum insured that your insurer is probably increasing each year (by about 3 or 4 per cent depending on the level of building inflation).
“Step Two: Use the calculator on your insurer’s website to price the replacement value of your home. You will need to measure your home to establish details like the size of your kitchen.
“Get a tape measure out and do some work because it is your biggest investment. Your insurer’s calculator will give you a cost to rebuild your home, as well as factoring in the cost to demolish what remains of the old home, remove the debris, pay for infrastructure services and cover off professional fees like engineering, Geotech and architects. The calculator will also add one year’s inflation to the sum.
“Option three: Hire a property valuer who can give you a figure. The Insurance Council has been working with valuers who now have a good idea of what to do. It’s a lot less work than using the calculator, but it will cost approximately $500 or $600. You can have a high level of confidence that this sum will be accurate.
“Option four: Hire a quantity surveyor, who is more expensive than a property valuer, but he or she will be able to give you a breakdown of your property and the costs involved in each of the areas. This equates to a high level of confidence in your replacement cost.”
Should everybody be using a valuer or a quantity surveyor?
“If you have a standard square box house on a section – which is pretty much half of most houses in New Zealand – you can be fairly confident with the sum supplied by your insurer’s calculator
“However, if you have unusual design features, an architect designed home, or you’re located on a difficult site – for example, a remote location, hilly section or narrow access way (any obstacles that will contribute to increasing the cost of a rebuilding) – then go to a property valuer or quantity surveyor.