Ngā Take PūteaAdd it up

Jul 2, 2013

Nā Diana Clement

If you watch TV you can’t have missed those talking letterbox adverts about home insurance.

Next time that ad comes on, don’t mute the TV or switch channels. Watch. This information is really important for your whānau.

That’s because home insurance is going through the biggest change in more than 20 years. No longer will your insurance company offer unlimited replacement cover for your whare if it is destroyed.

For the past few decades most house insurance policies have covered owners for “replacement” based on the size of the whare. If it was destroyed by fire, earthquake or other disaster, the insurer demolished the old whare and paid the cost to rebuild – with no upper limit.

Thanks to the Ōtautahi earthquakes, Aotearoa’s insurance companies have been spooked. Rebuilding costs shot up, and the insurers have spent far more than they expected on rebuilding. The actuaries who calculated premiums realised they hadn’t been charging homeowners enough to cover the risk. And overseas reinsurers who back our insurance companies have demanded change.

“Insurers and reinsurers didn’t know under the existing system what their exposure is until they rebuild,” says Insurance Brokers Association of New Zealand Inc. Chief Executive, Gary Young. It’s not a situation the industry wants to repeat.

So insurers are returning to old-style “sum insured” policies from the renewal date this year. That means if your whare is destroyed, the most they will pay is the amount you chose as a sum insured. It puts the onus on whānau to decide how much their whare, out buildings, paths, fences and other “improvements” are worth.

Working out the cost of replacing your whare isn’t going to be easy. Would, for example, your house cost $1,700 per square metre or $2,700 to rebuild?

Whānau can’t just use their registered valuation, which tells you what your whānau’s property would be worth to sell. Your sum insured needs to be based on the cost of rebuilding your house, which can be an altogether different figure.

Many whānau will opt to use an online valuation tool that will be provided by insurance companies. One of the first such tools available is from IAG, and can be found at IAG owns State, AMI, NZI, and Lantern; and also offers insurance through ASB and BNZ.

Using the calculator isn’t easy. You’ll need to know the exact size of your house in square metres and make judgements on the quality of fixtures and fittings.

Get the sum insured wrong, and the risk is that you choose too low a sum insured and the insurance payment won’t be high enough to finish the rebuild.

Conversely, if you over-insure, you’ll find that there are clauses limiting the payment to replacement value, which means you will have been paying too much for your cover for no good reason.

Broker Stuart Barr (Ngāi Tahu – Kāti Māhaki) of Rothbury Insurance says insurers are going to be tougher on Canterbury whānau than those elsewhere in Aotearoa thanks to the earthquakes. “The insurers will be more rigid and demanding in (Canterbury) because they have been burned.”

Barr recommends Canterbury whānau get an insurance valuation on their homes rather than attempting to work out their own sum insured using a calculator. “It is going to add extra cost to the process, but independence is important in an insurance settlement. If you set your own figure I think you are going to leave yourself open to debate after the claim.”

The insurance company is more likely to argue that you got the figure wrong if you did the calculation yourself online, rather than employing a professional to do the job.

A valuer such as Christchurch-based Valuation Solutions charges $550. It’s not something homeowners want to do every year. But it is worth remembering that insurance valuations don’t necessary go up at the same rate as house price inflation. The cost of replacing homes varies according to price changes in construction materials, consent costs, and building costs.

The big question for whānau is: “Will this cost more?” The insurers say premiums will go up for some whānau, and down for others. However, industry observers say most people will face increased bills for their house insurance.