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.
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