Own you own home, check! Got it insured correctly, probably not



The newspaper is full of timely reminders and this article is one of them. We are getting to 12 months in on the new home insurance approach of insuring for the rebuild value. It would appear that the vast majority are in for a shock when they have a loss to the house and they hear what it's going to cost to rebuild.

From the major insurers in the country the news isn't pretty. 60-75% of people took the rebuild value number on their insurance at the last renewal and just ran with it. Of the other 25-40% of people who did look at it and change it, 90% increased their cover.

The claims comment in the article would also suggest those who increased their coverage are the ones who probably have it right.

From the commentary from my clients, the premium for the last renewal was fairly similar, it didn't create too many waves. This says to me the insurance company at the last renewal sent out a rebuild value based around the premium the client was paying. 'You don't want to upset policy holders and have them all cancel, let's just under insure them'.

This clearly has risks for you the policy holder, as by accepting the renewal and paying the premium on the less than required cover you have indemnified the insurance company for the figure being wrong. You have accepted the renewal you must agree with the sum insured being correct.

So what does this all mean?

If you haven't had a claim in the last 12 months, you have paid about 30% less for your cover than you should have. It also means you have been under-insured for a similar amount. This isn't a situation you really want to have continue.

Let's look at it this way. You have a mortgage and you've borrowed 80% of the purchase value. You have a fire and the house burns down, yes worst case. The insurance company comes to you and says you're insured for X and it will rebuild you a 3 bedroom home at a similar quality level to what you had before. Problem is you had a 4 bedroom house with a study and a family room. Hmm there's a bit of a gap.

At this point you are going to be stuck between a rock and a hard place.

  • You can't sell the land and buy another house, you have a mortgage to pay. You won't get what you need to repay the mortgage and release the 20% you did have because it won't value up.
  • The insurance company won't just pay you the cash, it doesn't work that way either.
  • If you rebuild you're going to need finance for the rest of the house not covered by the insurance. This could be a problem as lending criteria, interest rates and your income may not qualify for the increased lending, especially in Auckland.
  • You rebuild your house to the size you can and get by. But you can't sell it as the value against your borrowings may leave you with little to no equity to buy a new home. Maybe worse, you sell it and you still have a mortgage to pay.

The problem with all of these situations, you lose the equity you have worked hard to build up in your property. It's not the insurance company's fault or problem, even though they may have helped contribute to it. You as the policy holder are responsible at the end of the day. Unfair, yes it is!

What can I do about it?

Call us! 09 215 8998.

If you are in the building industry you've probably ignored your own renewal, you know what the rebuild costs are likely to be, so get on to it.

For the rest it's a little more complicated as the value of your home to rebuild needs to be worked out. A valuer or quantity surveyor will likely be needed to get this worked out, there are also website that can assist. The warning is, to a point as they won't cover all situations or speciality buildings

Some recent extreme examples, a house purchased in the Waikato for $90,000, the rebuild value on this was $240,000. A property in Albany purchased for $1.4 Million, rebuild valuation $660,000. A lifestyle block purchased for $600,000, rebuild valuation $1.4 Million. It's very easy to get this wrong if you don't know what you're looking at.

If you have any questions or you are unsure how to proceed with getting it right, get in touch.

The information is only intended to be of a general nature and should not be relied upon in any part without obtaining full details of the products and services by contacting Willowgrove Consulting Limited. All product and service details, terms, conditions and other information are subject to change at anytime without notice. Terms, conditions and fees apply to the various products and services and are available on request. A disclosure document will be provided to you on request free of charge.

Jon-Paul Hale

Written by : Jon-Paul Hale

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