The home insurance shake up
On 22nd February 2011 a 6.3 magnitude earthquake in Canterbury killed 185 people, injured thousands and caused unbelievable property damaged. This event, considered an aftershock of the quake six months earlier, not only changed lives forever, it changed the face of house insurance in New Zealand.
Since then, home owners have no longer been able to rely on the apparent “comfort” and “safety” of total replacement home insurance. Instead most providers only offer “sum insured” cover, where the policy holder nominates a maximum sum which the insurer is obliged to pay to repair or replace the home.
This change from total replacement to sum insured moved the risk of underestimating the costs to rebuild homes from the insurer (and their reinsurers) to the homeowner.
The task of calculating the cost to rebuild your home after a natural disaster is an expert job. And because premiums are based on the amount of cover purchased, the tendency for most home owners is to underestimate the replacement cost.
Financial commentator, Rob Stock, recently quoted from an Australian report that during the ACT bush fires claimants were underinsured by an average of 40% of the replacement cost.
The primary reason was errors made in calculating the rebuild cost. Apparently over half the claimants used online calculators to estimate replacement costs, and these proved to be “a bit hit and miss”.
The sum insured will need to cover the total rebuild cost of your home in the event of a total loss.
This will usually include:
- The rebuild cost of your home as well as other structures such as decks, driveways, fencing, pools, carports and garages
- The cost of materials and finishing to get your house back to the same quality
- An allowance for compliance costs and professional fees such as architect or council fees
- Demolition costs
- GST on the sum insured.
Another common error homeowners make is failing to increase the sum insured after renovations and improvements.
Insurers claim that the change to sum insured policies provides greater certainty for policyholders. Claims are likely to be settled more quickly because the expectations are clearer. Under the sum insured policy, both the insurer and the insured know the maximum that is payable for a total loss.
Insurance providers also say that the move to sum insured introduces new freedoms to homeowners. For example, if your home is destroyed, you may decide to build something different, or better (by topping up the cash settlement).
Homeowners must now take greater care when insuring their home. An accurate and personalised sum insured based on a cost estimate from a suitably qualified professional is the best way to establish the sum insured.
When you’re buying home, consider getting an insurance valuation at the same time as you get a market valuation for your mortgage provider – doing this usually attracts a discount.
We’d be happy to connect you with the right people who can help. Call Cox Partners on (06) 835-4321.
