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Are you covered? Sum insured requirements and how this affects you.

House InsuranceInsurance companies are requiring customers to nominate a sum as the maximum amount the customer will receive in the event of rebuilding their home.

This ‘sum insured’ policy shifts the risk of the rebuilding cost being greater than the insured value from the insurers to customers. This article looks at this change and provides guidance on how to ensure your home’s sum insured value is sufficient to meet the cost of a rebuild.  

THE CHANGE

In the era B.C. (Before Christchurch) homes were insured for “full replacement” value. Your insurance premium was calculated by insurance companies based on their estimate of the cost to rebuild your home. This cost was calculated by reference to your home’s size, using a value per square meter calculation. Since the Christchurch earthquakes insurance companies have discovered that these calculations do not accurately reflect the costs of a rebuild. As a result, insurance companies have begun phasing out “full replacement” value insurance policies in favour of “sum insured” insurance policies.  This move will cap the amount your insurance company will be required to pay in the case of rebuilding your home.

ASSESSING THE COST OF A REBUILD

Two issues arise in nominating a sum as the “sum insured” value of your home:
  1. You insure your home for a sum which is less than the cost to rebuild. This will result in you either having to pay the extra costs to rebuild your home or will result in the rebuild not being to the same specifications as your current home; or
  2. You insure your home for a sum more than the cost of the rebuild. This means that your insurance company will meet the full rebuilding costs, but your insurance premiums would have been higher than necessary.

With these two issues in mind careful consideration should be made before specifying a sum as your replacement cost. It is important that you make all necessary enquiries in order for you to nominate a sum that closely reflects the costs of rebuilding.
How do you calculate the rebuilding cost? Insurance companies have provided do-it-yourself calculators and your CV may be another good place to start. However, these options have limitations. The online calculators may not accurately take into account all features of your home and CVs are often outdated and do not reflect current market values.
You could consider obtaining your own estimates, such as: a valuation report, quantity survey report, or quotes from various trades people. A valuation report may indicate the value of your home from a market perspective but not the cost to rebuild. A quantity survey or obtaining quotes, on the other hand, may provide a better indication on the costs involved in rebuilding your home. 

When deciding how to calculate your “sum insured” value you should also consider other likely costs.  What about private drainage? Housing connections such as gas, phone, and internet? The cost of demolition and replacement of driveways, garages, landscaping, or fencing? In the event of catastrophic land damage it may not just be your home that requires rebuilding. These can be costs that are overlooked.  

YOU HAVE SPECIFIED YOUR SUM INSURED VALUE. IS THAT THE END?

Unfortunately not. It is important that the sum you have nominated continues to reflect likely rebuilding costs. Costs associated with rebuilding can change over time and vary widely depending on the cost of building materials, workmanship, obtaining council consents, and the cost of replicating any special features of your home such as architecture or fittings. It is also recommended that your policy is updated regularly in order to keep up with inflation. If you decide to renovate your home you should also look to add the cost of the renovations to your “sum insured” value. Keeping your policy up-to-date is vital so that you get what is required in order to rebuild your home in the event of damage. 

At the end of the day the “sum insured” assessment is a cost-benefit analysis. The ‘conservative approach’ would be to err on the side of over-specifying. The ‘risk approach’ would be to trim the sum insured as much as possible and reduce your premium.

Insurance has come into real focus since the Christchurch earthquakes – many people have ended up much worse off than they would ever have envisaged. Scrutiny of insurance policies and terms is essential.

If you have any concerns regarding the extent of your cover under the new policy please contact us now

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