How NZ homeowners wind up under-insured

Do you remember the 2010/11 Canterbury earthquakes? I sure do. Not only did the tremors shake up my home, but they also shook up the residential insurance industry. If you own a house, it’s important to confirm the recent industry changes haven’t left your property exposed.

How residential insurance used to work.

“My house has three bedrooms, but what size is it, James?”

That was a question I used to hear when I was on the tools: a friend would be sorting out his house insurance and he wanted an idea of the square-metre size of his property. That’s what his ‘full replacement’ insurance policy was to be based on.

The insurance company was promising to repair or rebuild his home to the pre-claim standard. The problem was, that promise was based on the size of the home without determining whether the house was basic (maybe $1,000 per square metre to rebuild) or pretty flash (replacement could be more than $5,000/m2).

Calculating the coverage this way didn’t allow for a multitude of factors which impact the cost of reinstating a house:

  • Clearing the site (demolition of damaged structures)
  • Professional fees (geotechnical and engineering expertise)
  • Local authority consent fees
  • Construction costs (are materials and labour in high demand?)
  • Provision for inflation
  • Design (was the original house of low/medium/high specifications? Single or multi-storey?)
  • Site (is the land flat or on a hill? Are there retaining walls? Is there easy access?)
  • Utility service
  • Fences, driveways, gates, and paths
  • Recreational facilities (such as swimming pools)
  • Plant and decks

These factors can be significant, in some cases pushing the reinstatement cost well beyond what the insured property was worth. The system meant the insurance companies couldn’t say with any certainty what their overall risk was.

So, they made changes.

How residential insurance works today (in most cases).

Most insurance companies now use ‘sum insured’ for insuring residential properties.

This model has passed significant risk on to you, the homeowner.

As the property owner, you determine what dollar amount you want to insure your property for. This makes it easy for the insurance companies to calculate what their maximum pay-outs will be in the event of another natural disaster; the figures are already decided.

But – and this is important – the onus is on YOU to make sure the policy proceeds are adequate to reinstate your property.

I know it’s tempting to say “I’ll just insure it for the capital value on my council rates form” or even use the purchase price as the nominated sum… wait! Are you willing to gamble that those amounts will cover all the reinstatement factors mentioned above?

If you don’t specify a Sum Insured, the insurance company is likely to set a default sum based on the information they have. They may not have all the relevant information, and that may leave you with inadequate cover.

What can quantity surveyors do for your residential insurance?

Getting expert advice means the coverage you agree with your insurance company is the right coverage for your property.

A professional quantity surveyor is up to date with the costs of building materials and labour in New Zealand. They can take into account any unique features of your property – retaining walls, swimming pools, sleep outs – to make sure your sum insured doesn’t leave you high and dry when you need it most.

And this peace-of-mind shouldn’t break the bank. For instance, at Property Values Limited, we offer an insurance values service (up to 3 hours of reviewing and preparing a written report on your residential property) for just $300+GST. That might include:

  • Calculating the replacement values of residential buildings, garages, sheds and other outbuildings.
  • Calculating the replacement values of floor coverings, paths, fences, decking, retaining walls, utility services, private bridges, culverts and plant.
  • Calculating the associated specialist costs, including demolition.
  • Calculating any access or site-related costs.

You can see, when it comes to reinstating your damaged property, there’s a whole list of potential costs which not everyone thinks to include for insurance purposes. A professional quantity surveyor lives and breathes this kind of calculation project, and they’re ready to help.

What to do next

Check your residential insurance policy today – it’s worth reviewing every couple of years to catch any rapid changes to building costs. And ask a friendly quantity surveyor to help set the sum insured figure: not too low, not too high… just right.

James Cameron is a professional quantity surveyor, licensed building practitioner (carpentry, Site 3) and director of Property Values Ltd.

qs@propertyvaluesltd.co.nz

021 288 1311


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