Sum insured house insurance

For the last 20 years most Kiwi homes had a "total replacement" policy. You told your insurance company the size of your house and it worked out a premium based on that. If your home was destroyed in a fire or natural disaster, the insurer was responsible for demolishing the wreckage and building a new house to the same size and specifications as the previous one - with no limit to the amount it would pay.

But the Canterbury earthquakes were a big wake-up call to the insurance industry and particularly its reinsurers (the companies which insure insurers against the cost of major natural disasters and catastrophes). The reinsurers now require New Zealand homes to be insured for a specific capped amount. They want to know the maximum amount that local insurers and reinsurers would have to pay to rebuild homes after a natural disaster. Insurers need to assess their risk better and sum-insured insurance helps them do this by collecting much more information about each house.

When is this happening?

Nearly all New Zealand insurance companies will be making this change by the end of 2014. FMG is the only mainstream insurance company we know of that isn’t switching completely: it's continuing to offer full replacement policies outside the metropolitan areas of Auckland, Wellington and Christchurch; and in some cases (for rural and lifestyle block properties) will still offer it within the 3 metropolitan areas.

The insurance industry claims these changes will be "revenue neutral" for insurers. It also claims that while some people may see their premiums increase, others may see them fall. Those more likely to see an increase are people in high-cost homes that under total replacement policies have been "subsidised" by other homeowners. We suspect many homeowners may get a shock over their rebuild costs and find they're now facing higher premiums.

Making an estimate

When New Zealand last experienced capped insurance policies more than 20 years ago, the insurance companies helped homeowners estimate the rebuild cost. Now they're passing that responsibility to you.

The companies provide a "default" sum-insured figure when your house insurance comes up for renewal. The default sum is based on what the insurer believes your house size is plus a $2000 per-square-metre rebuild cost.

But the insurer's knowledge of your home may be limited, not accurate, or not up to date.

Check your default sum insured to see if it reflects the likely cost of rebuilding your home to its current specifications.

If you don't believe it does, you'll have to estimate the rebuild cost yourself. There are a couple of ways of doing this:

• use the online sum-insured calculator suggested by your insurance company
• go to a professional (a registered valuer or registered quantity surveyor).

Once you have a rebuild figure you believe is correct, you'll need to let your insurance company know. If necessary it will adjust the sum insured ... and your premium!

Tip: Don't use a market valuation (one used for selling your house) or your rating valuation (RV) to estimate your sum insured. These don't reflect the cost of rebuilding.

Professional help

People with large homes, architect-designed homes, or expensive homes should get an independent rebuild cost from a professional such as a registered quantity surveyor or registered valuer. (Registered valuers don't just do market valuations - they can also provide rebuild costs for insurance purposes.)

A valuer or quantity surveyor can spot things you might miss or that aren't covered by the calculators. They'll also build in construction-inflation costs for the next 12 months and the estimated time it takes to rebuild a house.

Such a valuation will give you a baseline for future years and may well be worth the cost. The valuers' and quantity surveyors' professional organisations are working with insurers to make sure their members cover off the right details when they’re estimating the sum insured.

We've done our own investigation (see our case study below) and there were significant differences between the calculators and what our registered valuer estimated.

Cost: Depending on the size and quality of your house, a quantity surveyor's valuation will cost from around $750 and a valuer’s from around $500.

Get your calculations right

You've worked out the sum insured and the premium looks horrific? Don't be tempted to under-insure. Under-insuring can mean you don't have enough money to rebuild, if your house is completely destroyed. As well, if you’re under-insured and have a mortgage then you’ll be paying off the mortgage on a rebuilt property that’s of lesser value.

Over-insuring runs risks too. You can't use your insurance pay-out to get a better house. If you over-insure, the insurer will only rebuild your house to the size and standard it was before. So you'll have wasted your extra insurance premiums.

Be aware of "demand surge". After a natural disaster - such as the Canterbury earthquakes - construction costs can rise considerably. When you're estimating your rebuild cost you're being asked to make a blue-sky guess about future prices. Some insurers are offering additional "Post Event Inflation Protection Cover" in their policies to account for potential "demand surge". This protection is paid out on top of the sum insured.

Get the right policy

1. Your insurance company is obliged to tell you what is and isn't covered by your policy. So get it to tell you – after all, it’s making you estimate the rebuild cost! The more information you have, the better.
2. Check whether you need extra cover for features such as swimming pools or retaining walls.
3. Will your policy provide temporary accommodation – and if it does, for how long? The time it’s taken for some Christchurch people to get to the rebuild stage has far exceeded the length of the temporary accommodation that their policies allowed.
4. Swimming pools, driveways, paths and fences now attract a special excess under recent changes by the major insurers – but only in the case of a natural disaster. This could be $5000 or more depending on your insurer and your location. If your fence is damaged by something other than a natural disaster (such as the kids kicking a football at it), then you'll pay the “standard” excess agreed with your insurer.
5. At policy-renewal time, check that your sum insured is still accurate. Your insurance company will be adjusting your sum insured in line with changes in the Building Consumer Price Index – so after the first time you shouldn’t need to re-estimate. However, if you’ve done any renovations or alterations, make sure they’re included (although you probably did this when the renovations or alterations were completed).

Our view

• Insurers should be doing more to help their customers calculate the sum-insured value of their homes. It's not good enough for a company to provide an online calculator and then claim no responsibility for the figures it churns out.
• Make sure you read all the paperwork and letters your insurer sends you about the changes. These should explain in plain English what's happening and what you need to do. You should be given about 6 weeks to make sure your policy's sum insured is correct.
• Ask about anything you don't understand.
• Look at other insurers' policies. You may find an insurer who can answer your questions and provide a policy (plus a premium) that suits you.
• Seriously consider hiring a professional to estimate your rebuild costs. They're in a better position than you are to calculate these accurately. (If you use a professional, check they have professional indemnity insurance.)

Report by Kate Sluka.