How insurance works

House insurance

This normally covers every domestic building on the property, including the house, pool, garage and fences.

Accidental damage is the most common type of cover. It insures you for everything not specifically excluded in the policy, such as wear and tear. This is the type we look at in this article.

Defined risk policies are less common. They cover you only for the risks specifically listed in the policy, such as fire or burglary. Many insurers offer only defined risk policies for holiday homes or rented accommodation.

With an accidental damage policy, you get 3 more options: an indemnity policy or a choice of replacement policies.

• Open-ended replacement cover will replace your house irrespective of the cost, and is the most popular. (Older houses where the wiring or plumbing has not been upgraded may not be eligible for this type of cover from some companies.)
• Sum-insured replacement cover will replace your house up to a specific dollar amount, as stipulated in the policy.
• Indemnity (or market value) cover will provide cover up to the current sale value of your house. This sort of cover is generally cheaper as you're not paying for the cost of a new product. For most people, this will be less than the cost of rebuilding, so a full claim on this kind of insurance usually means you have to sell the section and buy elsewhere.

Contents insurance

This usually covers your belongings when they are at home or temporarily moved elsewhere in the country.

The policies have a mix of replacement and indemnity cover (see above). That is, they provide replacement cover for certain items, such as the furniture and carpets, with indemnity cover for many other things.

Indemnity cover on a 5-year-old leather jacket means that if it is stolen, you'll receive a cash payment based on the original value minus an amount for depreciation.

Often, there's an overall sum insured. Most policies have maximum payout limits for specific items like jewellery. Items over this value must be separately detailed in the policy. Remember, some insurance companies require a valuation certificate for items over a certain amount. Getting a valuation for rare or valuable items is a sound idea.

Favourite things
State Insurance has introduced a contents policy called Favourite Things, which insures up to 9 items for a total sum insured of $10,000. It covers accidental and sudden loss or damage to these items while they’re in your home (or temporarily elsewhere in New Zealand) and up to $250 for accessories associated with them.

There are some catches:

• not all items are insured for replacement value
• personal liability cover must be bought separately (it’s an “optional benefit”)
• each item must be worth at least $250.

State's average Favourite Things premium for our “young single person” (see Consumer profiles) was $23 per month (sum insured $4000) compared with $52 per month ($25,000) under its standard contents-only policy. But the standard policy includes personal liability cover and Favourite Things doesn’t – so if you choose Favourite Things, make sure you also buy the “optional benefit” for personal liability.

Government levies

Your insurance premium includes a levy that goes to the Earthquake Commission, a government agency that provides EQCover.

The contents is covered on the same basis as your insurance policy. Items with replacement cover have replacement EQCover, the rest is indemnity. Because EQCover maximums are too low for many people, insurers usually offer top-up cover as part of their standard policies.

See Natural hazards for more about EQCover.

Excesses

The excess is the amount of each claim that you must pay yourself. Most “standard” excesses range from $100 to $250.

Insurers often increase standard excesses depending on claims history, location and age of the house, the likelihood of its being damaged, and whether it’s tenanted, shared with flatmates or used as a holiday home.

Some of our recommended policies charge higher standard excesses but offer cheaper premiums. Companies also offer “extra” excess options – these give a substantial premium discount for paying a higher excess.

Some insurers offer excess “refund” options. This means that if your claim is greater than the excess refund, they pay the entire claim and don’t deduct the excess. Excess refund options start at $350 for ANZ and National Bank; and at $500 for Kiwibank, Tower and TSB.

Tip: You can lower the cost of your premium by choosing a higher excess (which means you carry some of the claim risk yourself). See Ways to save for more information.