Are You Covered?

By | August 1, 2013

The Sum Insured requirements: what does it mean for you?

Insurance companies now require their policy holders to nominate a sum as the maximum amount they will receive in the event of making an insurance claim to rebuild their home. This ‘sum insured’ policy shifts the risk of the rebuilding cost being greater than the insured value from the insurers to the policy holder. 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.

In the era BC (before Christchurch earthquakes) homes were insured for ‘full replacement’ value. Your insurance premium was calculated per square metre by your insurance company based on their estimate of the cost to rebuild your home. Since the Christchurch earthquakes, insurance companies have found that these calculations often do not accurately reflect rebuild costs. As a result, insurers are phasing out ‘full replacement’ value insurance policies to ‘sum insured’ as a customer’s policy comes up for renewal. 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 an amount 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 the rebuild will not be 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 are likely to be higher than necessary.

With these two issues in mind careful consideration should be made before specifying a sum as your replacement cost. It’s important that you do some in-depth research in order for you to nominate a sum that accurately reflects the costs of rebuilding.

How do you calculate the rebuilding cost? There are a number of online do-it-yourself calculators, and your property’s Rating Valuation may be another good place to start. These options, however, have limitations. The online calculators may not accurately take into account all features of your home and Rating Valuations do not indicate rebuilding costs or current market values.

You could consider obtaining your own estimates, such as a valuation for insurance purposes, quantity surveyor’s report or quotes from various trades people. A valuation report for insurance purposes, quantity survey or obtaining building quotes will help assess the cost of rebuilding and may therefore provide a better indication when arriving at a sum insured value.

When deciding how to calculate your Sum Insured value you should also consider other likely costs. What about private drainage and housing connections such as gas, phone and internet? You need to take into account the costs of demolition and replacement of driveways, garages and landscaping. In the event of catastrophic land damage it may not just be your home that requires rebuilding. These can be costs that are often overlooked.

You have specified your Sum Insured value: is that the end?

Unfortunately it’s not the end of the road. 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 heritage windows. We also recommend that you update your policy 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.

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 with many people ending up much worse off than they would ever have envisaged. Scrutiny of insurance policies and their terms is essential to ensure you don’t come off second-best.

DISCLAIMER: This article is true and accurate to the best of our and the author(s)’ knowledge. It should not be a substitute for legal advice. No liability is assumed by us or the author(s) or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are the views of the author(s) individually and do not necessarily reflect the view of this firm. This article may not be reproduced without prior approval from us and the editor.

Copyright, NZ LAW Limited. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650.

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