If you haven’t already heard, a major change is taking place to house insurance. Homes are the most valuable asset many people have. It’s important to understand the changes, so you can have the protection you need. For the past 20 years, most homes in insured in New Zealand have had a total home replacement policy. Typically, this involved homeowners telling their insurer the size of their house and a premium was worked out largely on that basis. If a home was totally destroyed in a fire or an earthquake, the insurer was responsible for demolishing the wrecked building, and building a new house to the same size and specification as the previous one with no limit to the amount they would pay. In future, homeowners will be asked to state the dollar amount they want to insure their home for, in much the same way as they insure their contents, up to a Sum Insured. So, if a house is destroyed the Sum Insured is the maximum the insurer will spend to if a house needs to be rebuilt.
The Sum Insured is the cost to rebuild your home to the same size, with similar materials. When will the changes occur?
Some insurers are applying this policy to new customers now and will apply it to existing customers at the annual renewal of their insurance. Insurers will provide advance notice of changes and will explain what is happening.
A small number of insurers are not making this change, so it will not be for everyone.
How will I know how much to insure my house for?
Insurers do not expect their customers to become experts in rebuild costs. They will ensure that customers have access to tools to help determine their Sum Insured. For instance, on-line calculators will be available. By answering a set of simple questions about the house the calculator will give you a guide for how much it will cost to rebuild, therefore the amount you should consider insuring your home for. These calculators will be adjusted regularly to include changes in building material and labour costs, and include provisions for professional fees (such as architects), demolition and clearing the site to enable rebuilding, and inflation. They can only provide an indicative rebuilding cost based on the answers given to the questions asked. So, if the calculator does not ask a particular question about your home, it will not be included in the Sum Insured it calculates. Homeowners may also wish to seek professional advice of a quantity surveyor or builder to help calculate the Sum Insured. If you have done major renovations to your home, you should include these in your Sum Insured. You should also adjust your Sum Insured to take account of any renovations or changes you make in the future.
Also, ask your insurer what you are covered for and what you are not covered for. For example, will I be covered for the cost of getting new planning consents or architectural designs? Will it cover the extra cost to upgrade my old house to comply with current legislation after a loss? Your insurer is obliged to answer these questions, so you understand exactly what you are covered for. Can’t I just rely on my rates valuation or what I bought my house for?
No. The quotable value or value on a rates form has little bearing on the cost of rebuilding a home. These valuations, or the market price of a house will include the value of the land, but as insurers do not insure land, this will not be included in the Sum Insured. Neither the valuation for rates purposes nor the market value of a home reflect the cost of rebuilding a home and should not be used for this purpose. Why change?
These changes are occurring as a result of the Canterbury earthquakes and will bring New Zealand in line with how house insurance works elsewhere in the world. Following these earthquakes, global reinsurers, who provide cover and share the risk for continued insurance in New Zealand, have said they will only share the risk if they know the costs they face. The move to Sum Insured gives them that. Higher levels of certainty mean that insurance for Kiwis will remain as affordable as possible. Will Sum Insured home insurance be unique to New Zealand?
No. In fact, insurance on a Sum Insured basis is the norm elsewhere and total replacement is very rare. Sum Insured has been operating in Australia for many years and did so in New Zealand over 20 years ago.