Quake insurance - check before you buy a damaged house

News of insurance companies' differing approaches to how existing claims are transferred in a property sale has created as much confusion as it has controversy.

It started last week when the Press reported two insurers, IAG and Vero, took the view that properties with full replacement insurance would only have indemnity value coverage carry over in a sale.

Since then, myriad scenarios have emerged for what homeowners buying or selling quake-damaged houses are covered for, when and why.

The real estate and legal sectors issued urgent "please explains", worried that clients buying quake-damaged houses without the full replacement safety net would find new damage that wrote their property off.

First, the ground rules.

A full replacement policy is exactly what it sounds like - if your house is irreparable, you get a new one.

Indemnity value is more complicated.

The general definition is the current value of an item (your house), taking into account its age and condition at the time of loss or damage.

This is often different from a property's market value, which is a combination of what people are willing to pay for it and what the owner can fairly charge.

Bear in mind this is a theoretical definition.

Every insurer has its own method for calculating "current value", but the key difference from full replacement is indemnity takes depreciation into account - the current value of a 30-year-old house is less today than the day it was built.

Full replacement gets you a brand-new version of whatever you had, regardless of cost.

Insurance companies have always had policies for how existing claims are treated in a property sale, but rarely have they been as widely applicable as in post-earthquake Christchurch.

IAG and Vero's approach is that if a homeowner with full replacement insurance decided to sell their quake-damaged house, the buyer would take over the insurance claim for repairs, but if the property became uneconomic to repair settlement would be limited to the indemnity value.

They also ruled that if the original owner decided to settle for cash rather than exercise their replacement right - as they might if the house was a total loss - their payout would only be the property's indemnity value.

As IAG Canterbury recovery executive manager Dean MacGregor described it this week: "The insurance policy on the existing dwelling is between the current owners and the insurer.

"When [a vendor] chooses to sell their property then they choose to take a cash settlement approach. There is no opportunity to assign your right to effectively have a rebuilt home [to the new owner]."

Existing insurance claims are transferred to a property's new owner by a document known as a deed of assignment - ie, the claim entitlements are "assigned" to the new owner and capped at indemnity value.

"There is no opportunity to assign your right to effectively have a rebuilt home," MacGregor said.

"What you are assigning is the output of the claim."

The full replacement option was something the old owner had, and, because they chose to sell, was off the table.

This highlights another important point in IAG and Vero's approach: when you buy a quake-damaged house, you don't inherit the insurance policy, you inherit the claim and the insurers make case-by-case decisions on what new cover they can provide.

Lumley Insurance takes a different view on assignment - a new home owner would get full replacement coverage if that's what the old owner had. "We have no contractual right to change the way we would settle," its earthquake response manager, John Grant, said.

Tower Insurance declined to comment on the issue.

Everyone buying a quake-damaged house could be affected by this approach, but the number of people for whom it will actually be an issue is low. Real Estate Institute Canterbury spokesman Tony McPherson said the issue may curb sales of houses with more than cosmetic damage.

"Houses with moderate damage now will probably not be sold. It's not good business for the owner. They're better to wait and have it repaired and then sell. If this is the case it may have an impact on value."

Every insurance company is different and there isn't enough room in these pages to explain all of their positions on every issue.

The best advice is: if you're buying a house, and you know it has an insurance claim, check with your insurer, lawyer and real estate agent before doing anything else.

The Press