This content originally appeared in the Winter 2018 issue of Juno investing magazine.
Most insurance companies have changed their rules on house rebuild cover. If your home is damaged, there’s now a real risk that you might find yourself with only half the house you expected, says Priscilla Dickinson.
After the Canterbury earthquakes, most residential insurers moved from ‘rebuild’ policies, an open-ended cover based on a square-metre rate, to a capped ‘sum insured’. This means that homeowners are now responsible for calculating their home’s total rebuild cost.
We typically spend years paying off our homes but, when it comes to insuring them, there’s a tendency to underestimate the cost of a total rebuild.
If you haven’t calculated the true cost of rebuilding your home, you could be one of the 85 per cent of homes that could be underinsured, according to a recent Treasury report.
Richard Godman, underwriting manager of Vero Insurance, says a house insurance policy’s purpose is to replace what you’ve lost. “It’s important to get your sum insured right, because it’s the amount that the insurer will pay up to if your home needs to be repaired or replaced.”
As a homeowner, your main priority is to put an accurate value on the rebuild cost of your home. Most insurers have an online calculator for this, but many people get a valuation, just to be sure.
Will a free calculator valuation be enough?
Vero’s ‘Cordell Sum Sure’ calculator asks for the home’s address and then pre-populates all the details for customers to check.
Tower Insurance uses its own version of the Cordell Calculator, available through their website. AMI customers can visit need2know.co.nz.
The calculators allow for demolition (including removal of debris) and professional fees (such as council, architect, surveyor and legal costs). Vero recommends customers keep a copy of their sum insured calculation in case they need to claim on their policy.
Michael Brown, Willis Towers Watson’s national manager, broking, says people often accept a default sum-insured figure.
“When we help our clients, we remind them that most default sum-insured figures are conservative. These should be checked against a valuation or using calculation models. Many people that we talk to haven’t amended their sum insured from the default.”
Is a valuation required for a rebuild estimate?
Although a formal valuation isn’t required, many homeowners may prefer to use a valuer, particularly if their home is built to a high specification.
Willis Towers Watson suggests homeowners with higher-value homes or bespoke features get a valuation, as it will give a more accurate assessment.
“Typically, rebuild values estimated by a registered valuer, quantity surveyor, or builder are higher than the amount generated from the insurer’s calculator,” Brown says.
A valuation is likely to cost you anywhere from NZ$500 plus GST to upwards of NZ$2,000 for a luxury home, but the extra cost could save you thousands at claim time.
Reviewing your policy
It’s good practice to review your sum insured annually, or, as Godman recommends, “When doing anything on your home, such as structural renovations, adding a shed, or garage.”
Tell your insurer about any structural changes, including removal or installation of cladding, roofing, windows, or doors. Some policies include a small limit for building work, but most renovations require a Contract Works policy.
If your home will be vacant for 60 days or more, telling your insurer beforehand allows them to assess and cover any additional risk during that period.
Cover for incidentals and soaring costs
Most house insurance covers incidental costs separately to the sum insured (to specified limits), for example stolen keys, landscaping, and alternative accommodation if the home is uninhabitable.
Many policies have an in-built benefit, called ‘Demand Surge Protection’. This protects homeowners from soaring costs where there’s an increase in demand for materials and labour after widespread loss from an insured event.
A claim can be settled above the sum insured limit if the home’s replacement cost is higher. At Tower’s discretion, ‘House Plus’ customers can receive up to 10 per cent above their sum insured for natural disaster, flood, storm, and the replacement cost for fire.
The ‘SumExtra’ benefit under Vero’s ‘Maxi House’ policy pays up to 10 per cent above the sum insured towards the replacement cost for natural disasters, or the replacement cost for other causes.
Vero’s benefit is automatic, providing customers use the Cordell Calculator, a qualified valuer (or similar) to check the rebuild estimate of their home every three years (or when the size is increased or improved in quality), and keep a copy for their records.
Brown urges homeowners to regularly review their sum insured to ensure it keeps pace with current building costs and to check their policy, as some benefits are not necessarily automatic.
“Willis Towers Watson works with a panel of insurers, and one of the main considerations is their flexibility around replacement cover – not all insurers have equivalent offerings. We want our clients not to have any nasty surprises.”
Less cover? Smaller house
Your home is your biggest asset, therefore insuring it is a necessity. Sum-insured house insurance requires you to set the cost to rebuild your home. If there’s a shortfall, options include borrowing to bridge the gap or using a cash settlement to rebuild a lower-spec home.
By using your insurer’s calculator (or a registered valuer) to calculate the rebuild cost, retaining a copy and reviewing it regularly, you’ll be in the best position to have your home put back good as new.