In light of the significant weather events around the country in 2023, now is a good time for insureds to check the sum insured of their insurance policies to avoid a second crisis. Under-estimating the true cost to rebuild could result in financially devastating consequences.
A “sum insured” is the limit an insurer will contribute towards cover under an insurance policy. For example, for homeowners, the sum insured is usually the maximum pay out the insurer must pay when a home is damaged or destroyed.
Historically, insurers have often provided total replacement policies without homeowners having to nominate a sum insured. After the Canterbury earthquakes a move was made from total replacement policies to sum insured policies for most homeowners, due to a significant underestimation of the actual risk involved in insuring homes.
For many day-to-day claims, the sum insured is not of great significance, for example, a flood from a burst pipe requiring replacement of carpet in an area of the home. However, if a property is damaged badly or destroyed, the sum insured can be crucial. There is a real risk that if the amount is not set correctly, there will not be enough money to repair or rebuild to the same size and quality.
As MBIE reported in their biannual snapshot, the price of building a new home increased by 18% in the quarters March 2021 and March 2022, which has been the largest increase recorded since 1985. This rise was due to several factors including Covid-19, construction businesses experiencing higher demand, supply chain issues and increased labour costs. Since then, New Zealand has suffered several significant weather events, which has only put further pressure on the construction industry as everyone tries to repair their buildings.
When trying to set a sum insured, many people undertake an assessment using online tools. While these can be helpful, underestimating the actual costs to replace your home (which for many is their biggest asset) is an easy mistake to make. Special features and retaining walls both need to be included and when calculating the sum insured, demolition costs, council fees, council consents and other professional fees need to be considered. So, while online tools can provide some assistance, we recommend that homeowners consider obtaining a valuation specifically for rebuilding their home to ensure that if the worst happens, sufficient cover is available.
It is also a good opportunity to review what other cover is available under your policy. For example, if you need to move out of your home while it is repaired, will your additional rent be covered, and if so, for how long?