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EARTHQUAKES AND INSURANCE POLICIES
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Until recently it was common place for home insurance policies in New Zealand to provide full replacement cover in the circumstances where your house was destroyed. However, since the Christchurch earthquakes, most insurance companies have changed the basis of their house insurance policies.

Instead of paying you the full replacement cost of demolishing and rebuilding your home to the standard, size and specification it held before, insurance companies are now providing cover for a specified value only – the ‘sum insured’ for your house. This means that if the cost of rebuilding exceeds the ‘sum insured’, you will have to pay the shortfall.

What does the ‘sum insured’ cover?

‘Sum insured’ cover is likely to cover the costs of demolishing your home, which, as learnt from the Christchurch earthquakes, can be costly. This includes the removal of debris. The ‘sum insured’ will also cover the associated costs of rebuilding which could include professional fees, the costs involved in obtaining resource or building consents and meeting building standards. More obviously, the ‘sum insured’ will cover the costs of rebuilding including establishing foundations or structural elements required by your house site. Most ‘sum insured’ policies will also cover the costs of reinstating other special features such as fences, driveways, sheds, sleep outs, decks and swimming pools.

Calculation of the ‘sum insured’

As the homeowner, you are responsible for determining the ‘sum insured’ rather than the insurance provider. There are two methods of determining the ‘sum insured’:

  • Firstly, there is a range of online calculators available to determine the likely cost of rebuilding your house. The online calculator will ask a range of questions relating to the age, structure and materials of your house. We recommend that you ascertain the area of your house (in square metres) which may be stated on the plans of your house or council records. Although not essential, the determination will be more accurate with this information as some of the calculations are based upon this. However, the value can still be calculated without entering the area. One calculator we suggest is available here at need2know.org.nz.
  • Another option is to obtain a valuation by a specialist property valuer or quantity surveyor. This is particularly recommended for houses which have period features or are architecturally designed with non-standard design elements.

The change has caused some confusion amongst home owners, resulting in the release of a helpful information sheet by the Insurance & Savings Ombudsman available here.

Our recommendations:

  • We suggest using more than one online calculator, if this is the method you use to calculate the ‘sum insured’. Our experience is that valuations can vary, and it is good to get a value which you think covers all of the associated rebuilding costs. Speaking to builders is also helpful.
  • When using an online calculator, ensure that you do not estimate the total area of your home. The calculations are based upon the total area specified, so it is crucial that this correct.
  • Consider increasing your excess so that it minimises the increase in premium caused by the change to a ‘sum insured’ policy.
  • Remember to notify your insurance company if you are planning substantial renovations or improvements to your property or if the property will be vacant for a substantial period, as failure to do so could invalidate your insurance policy.

If there are issues outlined in this article which you would like to discuss with no obligation, contact our expert property team today.

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