Tackling the 'sum insured' challenge

NO SUM INSURED: Changes to the way insurers will value and pay out on damage to homes are coming.
NO SUM INSURED: Changes to the way insurers will value and pay out on damage to homes are coming.

For many people their home is their most valuable asset.

Until recently in New Zealand it's been usual to insure your home on the basis of total replacement cover. This meant that you would provide information to your insurance company about the size of your home and, if it was destroyed, then your insurer would arrange to demolish the damaged structure and rebuild you a new dwelling to the same size and specification as it was before.

There was no limit on the amount your insurer was required to spend in order to replace your home.

Since the Christchurch earthquakes, many New Zealand insurers have changed the basis of their home insurance policies; they now require you to specify a "sum insured" for your home. This means that if your home is damaged or destroyed then the sum insured is the maximum amount the insurer will be prepared to spend to remedy the damage.

The onus is now on you to tell your insurer the cost to rebuild your house. If you under-estimate the cost and your house is destroyed, your insurer will not be prepared to rebuild your home to the same size and specification as it was before.

It's also worth noting that the rateable value of your home doesn't have a direct bearing on the cost to rebuild, therefore it is not a good idea to rely on the RV for insurance purposes. Instead you should investigate the actual cost of rebuilding your home to set your sum insured.

There are two methods to help you set the sum insured:

1. Online calculators: Some insurance companies provide online calculators to help you work out the likely cost of rebuilding your home. If you choose this option, you may want to ensure you cover any recent house additions or renovations. If you're contemplating any major renovations within the next 12 months, make sure these are covered as they're likely to increase the cost to rebuild your home to its current standard.

2. Property valuer: An alternative to using an online calculator, particularly if your home is an older house with period features or perhaps architecturally designed with non-standard design elements, is to engage a specialist property valuer. A valuer can provide you with a more accurate valuation of rebuild costs than an online calculator so you can use that information to establish the sum insured.

When renewing your home insurance policy you should also remember that you have a duty to disclose all material facts to the insurer which may affect the risk being insured.

For example if you are planning substantial renovations at your property, or perhaps anticipate leaving the property vacant for a period while you are overseas on holiday, then you should disclose that information to your insurer.

If you forget to provide that information it may mean you could jeopardise your insurance cover if you make a claim on your policy.

The need for you to set a sum insured when you renew your home insurance policy is a good reminder to review all the information you have provided to your insurer about your home, such as your excess, and also a review of your household contents insurance.

It's important to get your sum insured right so you have appropriate insurance cover when something goes wrong. Using an online calculator or a professional valuer will help you get the most from your policy.

Elspeth Horner is a partner in Wellington law firm, Morrison Kent. Information in this column should not be a substitute for legal advice.

Sunday Star Times