House insurance in New Zealand underwent a significant change in 2013, following the Christchurch earthquakes. The industry switched from the Full Replacement policy that was introduced 20 years ago to a Total Sum Insured system. The change was driven by international reinsurers or underwriters, who required a clearer picture of their natural disaster exposure, and to mitigate the threat of soaring premiums which would make house insurance less affordable.
The previous full replacement policies meant that if your home was destroyed your insurance cover would essentially replace your home to the equivalent size and standard, no matter what the rebuild cost. There were variations between insurance companies as to what was deemed equivalent and what was included, but the claimant had the peace of mind that if their 4 bedroom brick and tile home was destroyed, their insurance would build them a new 4 bedroom brick and tile home.
A Total Sum Insured policy puts the onus on you as the homeowner to come up with a value that represents an accurate reinstatement cost if your home is destroyed by fire or in an earthquake.
Once this value is set, your insurance provider creates a policy based on a fixed sum – any claim you make is capped so that the maximum amount they will pay out is the total sum insured. Your premiums are set based on the total sum insured, and the homeowner is liable for any costs to rebuild exceeding the cap.
Working out the reinstatement cost of your home accurately is important. If you set the value too low, the amount your insurer will pay out will not be enough to cover the costs and you will have to somehow make up the difference, or even be unable to rebuild to the same standard or size. If you are worried about over estimating the costs, the differences in your premiums is not going to go up so much that this should be an issue. Even though the total sum policy is for a maximum amount – it is not a guaranteed sum – it is better to be a little over than a little under with your estimated replacement cost.
You cannot use rateable values, market values or purchase price to work out the rebuild cost for insuring your home, as these include the land value which you can’t insure.
The maximum amount payable to repair or rebuild your home should include:
For a detailed look at how to work out the total sum insured for your home, Read our article about House Valuation – how much cover to insure my home?