Andrew Hooker says there is more you should know about the value you insure your house for, and the limits of quantity surveyor reports

Andrew Hooker says there is more you should know about the value you insure your house for, and the limits of quantity surveyor reports

By Andrew Hooker*

A recent article drew attention to the fact that most major insurance companies are now no longer prepared to offer cover under house policies without a specified sum insured limit.

Up until very recently, most insurance companies were prepared to insure houses without a specified sum insured up to an agreed square metreage.

What this meant was that customers could be sure that they would always have enough insurance to rebuild their house as long as they identified the correct size of the property. 

There was some discussion about whether the change from no limit house insurance to sum insured house insurance could really be blamed upon unexpected losses through the Christchurch earthquakes.

Whatever the case, the fact remains that most major insurance companies will no longer insure your house without you nominating a maximum sum insured.

This places the onus directly on the customer to make sure they get their sum insured right. 

Insurance companies have offered web-based systems to help in calculating the sum insured, but these are just a guide only with no guarantee that there will ever be enough cover should the house be totally destroyed.

The best advice that people have received is to employ the services of a quantity surveyor to calculate the true reinstatement cost of the house. 

This has led to a new industry in which quantity surveying companies are marketing their services specifically to calculate and advise on appropriate sums insured for domestic house policies.

This must be paid for by the customer, adding significantly of course to the cost of insurance. 

You could be forgiven for thinking that once you spend the money for a quantity surveyor, you are guaranteed that you would obtain the benefit of the sum insured identified by the quantity surveyor, and built into the new policy.  But that is by no means guaranteed.

This is because the sum insured that you identify in your policy is a maximum sum insured, not a guaranteed payment.

In other words, if your house is totally destroyed, the sum insured that you have nominated is simply the maximum the insurance company will pay.

No insurance policy for a house will guarantee that you will receive that amount.

One of the lessons learned from the Christchurch earthquakes is that there is often a large mismatch between the expectations of the customers as to methods, quality and extent of reinstatement and those that the insurance company is prepared to offer.

Much of the litigation coming out of the Christchurch earthquakes relates to the precise obligations of insurance companies.

For example:

(1)   There is still considerable debate about the extent to which the insurance company must provide like for like, particularly in relation to aesthetic elements;

(2)   It is by no means clear the extent to which the insurance company is required to incorporate the latest building practices into a rebuild;

(3)   There are endless debates over whether buildings can be repaired or whether they need to be completely rebuilt.

Naturally, most quantity surveyors will want to be careful that they are not underestimating the cost to rebuild your house. But there is no guarantee of course that the methodology, quality and cost of rebuilding used by the quantity surveyor when calculating your sum insured will be followed by the insurance company.

It may be that, years later when a house is destroyed, the insurance company may simply disagree with the quantity surveyor and take a position that it can rebuild the house much cheaper.

So, even if you spend the money and have a quantity surveyor calculate the cost of rebuilding your house, there may not be any guarantee that the insurance company will allow you to spend what the quantity surveyor has included in the calculation.

The only way to be certain would be to submit the detailed quantity surveyor’s analysis to the insurance company and seek some kind of undertaking that the basis of calculation followed by the quantity surveyor will be adopted by the insurer. It is unlikely that many house insurance companies will be particularly interested in going to this time and expense to give you that certainty.

So what is the result?

The result is that, the customer is taking all the risk.

If the customer does not employ a quantity surveyor to ascertain the cost of rebuilding, it is quite possible and experience suggests quite likely, that the sum insured could be far too low.

But even if the customer goes to the cost of employing a quantity survey to calculate the reinstatement value, that is simply a maximum amount the insurance company will pay with no guarantee the insurance company will accept the quantity surveyor’s calculations. 

The entire risk of assessing the sum insured falls on the insured with no guarantee it will be sufficient and not excessive until claim time.

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*Andrew Hooker practices as a specialist insurance lawyer in Albany on Auckland's North Shore. He is also director of Claims Information Specialists Ltd, an insurance information website.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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9 Comments

It's not unreasonable. As the owner you should know what it is that you have. 
I like the idea of submitting the QS report in the application for cover - even if the Insurer  isn't  contractually obliged to  adhere to the spec's it would certainly assist in resolving any  disputes over intent.
 
EQC and Ombudsman cap figures are increasingly irrelevant to many situation which would have been intended to be included in original legislation 

While I agree that the _responsibility_ is part of the ownership, the reality is the market is constantly changing as are the materials and labour and legislations.  Few owners will be constantly and accurately up to date on latest information, it would be unfeasible to constantly track it.

The "maximum value" is therefore just a cap figure.
No surprises there, expecting the insurance company to expose themselves to unlimited risk, for a fixed figure is hardly going to be practical.  Also they must take a partisan position on the value of the property, as they have an opposing financial interest to the customer - maximum premiums for minimu payout ("ideally").  Thus they shouldn't really be giving valuation indications to their customers with that conflict of interest.

Part of the difficulty is that the same or similar information must be re-examined each year to be current.  Perhaps a database could be constructed with major elements, and stored and updated by surveys or QV to reflect "Reasonable Cost" of rebuild to guide clients on what the cap should be set to.

It strikes me as the kind of thing interest.co could chart, in a similar way to other things. The trick might be, since I don't think there is a standard measure, coming up with a composite index - building materials costs etc, or I suppose you could just go with the  cost per square metre based on residential building permits. Call it the rebuilding index. If you wanted to get really fancy, you could try and factor local disaster (fire) vs wide scale with the inflation of building costs.

In a free a market insurance companies that offer 'peace of mind' of 'replacement insurance' would out market 'sum of insured' companies. The fact this is not happening indicates the market is no longer competitive...

 
Shouldn't the government really be stepping in, and maybe even creating a state run insurance company. I haven't heard labour come up with that policy yet. Many insurance companies in NZ are simply brands for one large parent, so not really much competition in  the market.
With these changes, many people will be paying alot more to insure their house, if they are actually insuring it for what it would really cost to rebuild it in todays market. This is because it is often more expensive to build, than it is to buy an existing house already built. I will use a friends house as an example. It has a RV of $840k, which is what QV considers to be a fair indication of it's market value. The LV is $460k, so that values the house alone at just $380k. The house is however highspec and architecturally designed, and is also 380 sqm so quite large. An assessor came in to assess the house for insurance , on what it would cost for it to be rebuilt, and they came up with the figure of at least $1.6 million to rebuild, which is around $4k per sqm. So this would make a total value of the house plus land if rebuilding and buying the land separately, at about $2.1 million. However noone would ever buy that house for that. And if its RV was that high, they would be paying $10k + per year in council rates!
Obviously a house that is insured to be rebuilt to 1.6 million is going to have significantly higher premiums. It is really win win for insurance companies, as they have already put premiums up significantly after the EQs, and that is just on their old standard replacement cover rate. Agreed value is then likely to increase that even further, as it costs a lot more to build now than it did in the past.
There was an article in the paper to say that insurance companies were concerned that not many people had contacted them about modifying the agreed value figure that the insurance company had come up with, which is essentially a simple calculation.  Is it really any surprise, when it needs specialist help, and is expensive to get it right.  Although I did use the insurance websites online calculator,  to calculate the above example, and it came up with a 1.5 million dollar rebuild figure, so it was reasonably accurate.
So NZ will move from being one of the most insured countries, to one which will have many houses that are under insured. That isn't really a good look. I guess many people see that if a major even occurs, as long as they get enough money from insurance to move elsewhere and buy an existing house, then that will be fine. But what happens if the house is only significantly damaged, and they need a significant amount more to repair it, to allow it to be resold, to allow them to then get their money out of it.
But the government doesn't want to be too hard on insurance companies either, as otherwise they may decide not to do business in NZ. I also think EQC is now redundant, and is more or a hindrance than anything.
 
 

Labour has announced plans for KiwiAssure, a state run home & contents insurer  http://www.interest.co.nz/news/67134/labour-party-plans-expand-state-own...

Any vagueness works for the insurance company only..There will be more American-style litigations in the future, when the time comes for the insurance companies to settle claims, en-masse in the event of earthquakes, etc. Every house owner will have to live with some measure of uncertainty about the insurance he has on his house. The fine prints will always take care of the insurance company and kill the insured. And we have a 'too big to fail' monopoly insurance company in NZ, so they will get the government bail out too, if it comes to that..What a sweet position to be in.

Hzve just been through this exact exercise myself.    QS (two quotes, reputable firms) between $1k and $1.3k - a day's work, more or less.
 
Insurance co (IAG) had provided an estimate based on sqm of house.  So I looked at the per sq m rate, decided they'd ignored demo, new standards (TC2 founds, lighter roof) and accommodation for the time for any rebuild. 
 
Rang insurer, added $100K to the figure.  Extra premium:  $14/month.
 
As AH notes in the srticle, sum insured is a maximum, and I'd also note thst insurance is always a risk/cost trade-off.  I'm quite happy to ring the insurer and vary the figure if my back of envelope addition seems a bit light in future.  Or accept a larger excess.  Can be done at any time.
 
But I'm sure as sugar not plowing a years' premium, every 2-3 years, into the capacious pockets of QS who will re-learn, on my dime, the BOM for a rebuilt house.
 
Because that's what the net effect is:  a cottage industry of borrowing yer watch, tellling yer the time....
 
Different for commercisl:  YMMV.

Thats quite a rise in the premium, as it is and extra $170 for the year. What is the percentage increase on both the value increase and the premium increase, and the amount is a bit meaningless without knowing those. 
Comapnies will often break down costs to price per month or week, becuase it makes it sound small, but I would always work it out over the year.