Do you own a house in New Zealand?
Are you aware that your insurance is changing?
Are you worried about how this will affect you?
It is vitally important that you understand what is happening with house insurance in New Zealand!
Up until now, if you had house insurance it would most likely have been a full replacement policy based on the floor area of your house. This has given New Zealanders peace of mind that if their house was destroyed their insurer would provide a new house of the same size.
Due to the cost of repairs and rebuilds in Canterbury after the earthquakes, the whole of New Zealand is seen as a bigger risk to national insurers – and to the overseas companies that reinsure them.
While this may seem unfair to people who believe they live in a low risk part of the country, from an insurance perspective, all of New Zealand is on the Pacific ring of Fire and therefore at risk of earthquakes and volcanoes.
So, what will happen to your house insurance policy now?
For example, if you have a 100m2 house (pretty small by today’s standards) then you will no longer be insured for a full replacement house of 100m2. Instead, you have to determine how much it would cost you to build your house today if it was totally destroyed.
From the people I’ve spoken to, I’m not sure that they full comprehend the risks involved to them as property owners.
The first step is to estimate how much it would cost you to build your house today. A building company should be able to give you a per square metre estimate. This is your starting point.
Then you need to consider whether your insurer also expects you to pay for the demolition and removal of the damaged house.
This will need to be paid for before they can start building your new home.
Given how fresh Christchurch is in our minds, and how people are still struggling with their insurance companies more than two years down the track, you’ll need to build in an allowance for increasing construction costs and inflation during a major disaster.
The amount the rebuild will cost will depend on whether your house is the only one damaged (e.g. fire), or whether it’s part of a more widespread disaster. You won’t know this until you need the insurance! Perhaps this is why there has been a spate of arsons in Christchurch?
Even with an insured value policy, you’ll still encounter problems with your insurer over whether your house can be repaired, or whether it is a rebuild. As seen in Christchurch, the insurance companies will limit their payout as much as possible, sometimes correctly and sometimes rather unethically. If you know that you only get ‘X’ amount of dollars to rebuild your house, you won’t want inflation eating away at that, so will want quicker action from insurers than has been seen in Christchurch.
There are potential problems that spring to mind..
How will banks determine that you have your house insured for a high enough value to replace the security provided in the mortgage?
What about over or under insuring? On one hand you want to make sure you have enough cover, but on the other hand you can guarantee that premiums will also rise at the same time as these policy changes. Some people will choose their value based on the premium they can afford.
Also, my own personal question.. If I have a character home, built using quality materials (such as rimu), does this now mean that I can insure it for a large enough amount to replace it with another character home, rather than a 90m2 modern dwelling built on the cheap? Under the current replacement policy, I’d have had to make do with cheap modern construction. Will these policy changes actually give character home owners more choice over how much they insure for?
If you are concerned about how to properly protect your home, it is always advisable to consult a professional. A valuer can provide you with an insurance valuation, but obviously there is a cost involved with having this done. Insurance valuations are common in the commercial property sector, but are paid for by the tenant. I think it is rather harsh that homeowners are now saddled with a substantial risk that many are not properly educated about.
By the way, if you haven’t read “Who is Meg?“, I don’t work in insurance, or valuation. These views are my own as a property owner.
Here are a couple of links with information on the insurance changes: