Insurance — sum it up!


You may recall about this time last year I wrote an article on changes to the way properties were going to be insured as insurance companies were moving away from an open ended replacement cost to a fixed sum insured approach.

At the time I had been talking with insurance companies who were conscious that the public may want to seek advice from building experts on how much it would cost to rebuild their home in the event of a loss, and they thought builders were a good source of information.

I recommended that you not provide that sort of advice unless you knew what you were doing as it is full of fish hooks and your insurance probably didn’t cover you for this sort of professional service.

My concerns related to the very high chance of home owners being under-insured, and in the event of a shortfall of funds looking to the one who provided the advice on the current replacement cost to make up the difference.

Should that person be “suitably qualified” — for example, a builder, valuer, quantity surveyor, engineer or architect — the courts would most likely be sympathetic to any legal action by home owners and you could be forced to pay the shortfall — unless you were adequately insured.

So one year on has anything happened to change my mind? The simple answer is no.
If anything, I believe there is a real risk that we are under-insured as a nation, and in the event of another Christchurch happening somewhere, property owners will find themselves short on the amount of money needed to replace what they had before.

I have spoken with insurance brokers and others on the subject and they agree. Indeed, there is one quantity surveying firm who believes more than 90% of New Zealanders are under-insured.

Why do I think this? Well, as annual insurance policies rolled over during 2013 most switched to the fixed sum insured model. Now, there is nothing wrong with this as long as you know what you are doing.

Many insurance companies provided support to home owners by having an online calculator so they can estimate the replacement cost of their home, while others had a default amount of $2000 per square metre (psm) based on a house of 200 to 220sq m, if not told otherwise.

This may not seem too bad to your average punter, and many think that $2000 psm is plenty if they had to rebuild today.
Well, it might be, today, but it is not today you have to worry about — it’s tomorrow, and tomorrow could be five to six years away, and by then it could include a whole lot of other costs and unknowns, and be a different amount (for the same property) depending on what your insurance covers or does not cover.

Huh? I hear you say. Well, let’s say it does cost $2000 psm to rebuild your home today and you lock that figure in. The insurance period runs for 12 months so you have to assume you have a loss on the last day — 365 days from now. So you have already lost any inflationary increases over the past 12 months.
Assuming you have a total loss on day 365, it will then take 12 to18 months to sort out (if it is a one-off single incident — for example, a house fire), so you have lost another year and a half of inflationary costs.
At present, that $2000 psm has gone to about $2200 psm (at a 3.5% compounded per annum national construction cost index).
But, if your claim formed part of a large natural disaster as in the case of the Christchurch earthquakes, it could be five to six years before you get to rebuild your home.

And we know from experience that the construction cost index in Canterbury has been about 10% for the past few years, and if that continues even at 5% for the next two years then after five years your $2000 psm has gone to $2935 psm. This does not take into account demolition costs or other unknowns that may eventuate.

If you are caught with being under-insured you will be forced to “cash out” and start rebuilding as quickly as possible. Trouble is, everyone else who finds themselves short will be doing the same.

In summary, I think it will take some time before we twig that we are potentially under-insured as a country. In fact, it might take a court case or two to reinforce that view.
In the meantime what did I do? I doubled my cover!