Let’s walk through the major change for house insurance following the quakes in Christchurch. You are now responsible for calculating the cost of replacing your home as you set your insurance levels. Most New Zealand insurers have already rolled this out as you renew your existing policy or buy a new one.
The traditional replacement policies which guarantee our homes will be rebuilt no matter what the cost, are now almost all phased out. In their place will be ‘sum-insured’ cover that caps the amount that insurers will have to pay out if your house needs to be replaced after a catastrophe.
With the cost of rebuilding Christchurch reportedly between $20 and $30 billion, insurers have been after a more precise idea of how much a similar event might cost in the future. Having you set a cap on your insurance is one way of doing this.
This brings up the all-important question: how do you figure out what it would cost to replace your home?
Getting your sums right
Your sum-insured figure has to be accurate and kept accurate, and it’s up to you to make sure it is. To help, online calculators like this one at need2know.org.nz have been developed for New Zealand conditions and are a good place to start.
If your sum-insured number turns out to be too low, you could end up not receiving enough to replace your home and having to pay the difference. If your number is too high, you may be paying for insurance that you don’t need.
Remember, your estimate cannot be based on how much you paid for your house, or even how much it cost you to build it. It is not how much it is worth today and has nothing to do with its rateable value, either. And it does not include the land value, since insurers do not insure the land you build on.
Instead, it is the amount it would take to completely rebuild your home in the event of a disaster – including any professional fees, council, demolition and removal costs that might be necessary before rebuilding can even begin.
The cost to rebuild will change every year due to building costs, inflation and rising house prices. It makes sense to do an annual review of the costs. You’ll also need to allow for any renovations you may have had – if you redid the kitchen or added an ensuite.
What a calculator can’t do
While you may start out with a ‘safe’ sum insured, when money’s tight, won’t it be easy to just skip raising that sum each year and avoid paying increased premiums? Companies and calculators may suggest a higher amount, but it is up to you to increase your sum insured.
I’m sure you’ll agree that each of our homes is unique. Although the online calculators should be able to give you a general idea and periodically adjust for inflation and market conditions, one size cannot fit all.
What happens if your house has special features? (I’m still dreaming about a soundproof music studio at home someday. That would certainly cost more to replace.)
Building costs themselves can vary because of so many circumstances, for instance, site location and accessibility, design costs, building consents – things that a calculator may not include.
The good news is that you can get help. One place to start is the Property Institute Member Directory, where you’ll find a qualified valuer near you. You might decide you want a valuation each year to keep up with your circumstances. A licensed builder may also be able to help you estimate the likely cost of rebuilding – but keep in mind it may not be their area of expertise.
It’s complicated business, all this, but it’s good to stay informed as you insure your home and keep it covered.