Warning over home insurance calculators

SUM INSURED: In the future it will be the homeowner's job to estimate how much it will cost to rebuild their home.
SUM INSURED: In the future it will be the homeowner's job to estimate how much it will cost to rebuild their home.

A homeowners' lobby group is warning people not to rely on free online insurance calculators the insurance industry is offering as a quick and easy way to work out rebuilding costs.

Free house insurance calculators are being offered by insurance companies as they begin switching New Zealand homeowners from open-ended home replacement to capped cover.

Reinsurers no longer want to underwrite uncapped cover after being stung by the Canterbury earthquakes, so people will now be covered up to a limit.

If the amount the home owner sets is too small, they will not be able to rebuild after a fire or natural disaster. If too big, they will overpay for insurance.

Home owners can pick their own limits using free online calculators or pay between $500 and $2,000 for a professional valuer or quantity surveyor.

Although valuers stand to win new business, the president of  valuers' institute is concerned people are being handed too much risk, too quickly.

Terry Naylor said people at the cheaper end of the market should be exempted from the change. ''The ones building for $3,000 a metre are the ones who are likely to get a certificate from a valuer, and they can afford it.''

Home owners' lobby group, the Home Owners and Buyers Association, advises people avoid using the free online calculators because insurers offering the calculators disclaim any liability for the sum, leaving no-one to turn to if someone is under-insured through no fault of their own.

''At least if you pay a professional you have recourse to them,'' says HOBANZ president John Gray.

But the reality is that many people will baulk at the cost of paying a professional, says John Granville, executive director of the Institute of Quantity surveyors, which he estimates at $750- $2,000 to pay a surveyor. Valuers may start at $500.

''Most New Zealanders will just accept a rough figure and take the risk, as long as it keeps the premiums down,'' said Granville. ''Until there is a real disaster.''

Valuation experts say the online calculators may miss important quirks.

A high stud height, high quality fittings and unstable land combined could double the cost of a rebuild, says PropertyIQ chief executive Nigel Jeffries, whose company is building two rival calculators.

AA Insurance head of customer relations Suzanne Wolton says stud height is taken into account for some houses if their age makes them more likely to be high-roofed.

But the AA Insurance calculator, supplied by international company Cordell, assumes land is stable and would not require extra strong foundations. While it asks about the overall quality of fittings, the calculator does not account for renovations of different ages, including new kitchens or bathrooms. IAG's calculator is similar.

''It does change the risk profile of the relationship,'' says Wolton. ''If the calculator doesn't ask you a question about significant feature of your home, it won't be taken into account and you should go to a valuation expert.''

Insurers said they would explain to people that those with big, high value homes or homes with special features should not rely on calculators. For many others free calculators would be useful - certainly more useful than supplying nothing, said IAG.

IAG said people were better equipped than insurance companies to know what might increase their rebuild costs. But valuation experts question whether people are equipped to know that, and whether the calculators are detailed enough or prompt people sufficiently to consider the right questions.

Many people in Christchurch, for example, had no idea they were living on unstable land. Many did not even know their own floor area and some Government valuation floor areas turned out to be wrong, says Naylor.

''The calculator will be satisfactory to many people who have standard sized, standard-built buildings. It will never be appropriate for people who have done things to their house or don't know enough detail about their house or have special features,'' says Granville.

There was potential for high inflation after a disaster.

In a situation similar to Christchurch, with new council rules and a scarcity of builders, costs might spike by 30 per cent, said Jeffries.

AA Insurance said its policies will provide no allowance for this because it would drive the cost of insurance up.

Even valuers sometimes get rebuild costs wrong. Gray cites an example of a valuer whose estimate for a Christchurch apartment block was $2 million under cost, even excluding the extra cost of quake-related changes to council planning rules. The owner is considering legal action.

AA Insurance and IAG point out capped insurance is common in Australia but Jeffries said most Australians don't properly understand the risk nor accurately grasp their home's rebuild value.

''It is more important here because of the greater risk of natural disasters.''

A 2005 report by the Australian Securities and Investment Commission investigated why so many people who lost their homes in the 2003 Canberra bush fires were unable to rebuild. It laid part of the blame on capped policies, which it said burdened ill-equipped consumers with estimating rebuild costs.

Tips for capped insurance:
1. For any building work done ask the builder for a schedule of materials used and the cost to help you value your rebuilding cost.
2. Review your house insurance annually to account for inflation, renovations or council building code changes.
3. If a building cost calculator doesn't ask about an aspect of your house you think is important, it won't be covered. You might need a professional valuation.
4. If building costs spike suddenly after a natural disaster, you may not be fully covered.