PROTECT your home from risk

What you need to know about insurance when building or buying in 2022.

PROTECTING your house from damage caused by fire, flooding, earthquake or other disasters used to be simple: Get full replacement insurance cover, and relax. If the unexpected happened, the insurance company would repair the home or worst case, rebuild it to a similar size and quality.

That was before Christchurch 2011. After Canterbury’s earthquakes, most residential insurers moved home insurance policies from full replacement cover to a capped sum-insured value. Homeowners specify an insurance value sufficient to cover the cost of a complete rebuild, representing a cap on the total amount the insurer has to spend when repairing or replacing a home.

The new system transfers responsibility for assessing rebuild costs to homeowners, and evidence shows many are unwilling or unable to calculate an accurate cost.

It can be difficult; worst case, involving total demolition, removing rubble and building a home compliant with the current building code. All this may exceed the market value of the existing dwelling.

AA Insurance says: ‘‘Imagine if your home was razed to the ground, but when it came to time to rebuild you discovered the amount you insured it for fell short by $100,000. This could be the difference between a two- and three-bedroom home, or having a deck and garage. Would you be able to find the extra money to complete your home? So it pays to make sure your sum insured value is adequate to cover the rebuild of your home to get it back to its original state.’’

Clearly, if you under-insure your home to help keep the premium down, this can create a false economy in the event of a disaster.

LOWDOWN ON COASTAL PROPERTIES

With global warming and an increased threat of flooding, insurance companies are signalling that properties in some coastal and low-lying areas may not be covered in future.

According to research led by climate and insurance specialist Belinda Storey for the Deep South National Science Challenge, at least 10,000 homes in our biggest cities will be effectively uninsurable by 2050. However, spiking premiums and policy exclusions could be felt as soon as 2032. The study looked at effects on insurance for the 450,000-odd houses within 1km of the coast and found that their premiums to cover flooding would be five times higher than today (reaching $10,000 a year) after 15cm of sea level rise, if insurers priced the increased risk into policies.

Christchurch and Dunedin have the largest numbers of homes in the risk zone affected by premiums quadrupling or worse – at least 4850 and 3100, respectively, after 13-14cm of sea level rise.

In Wellington, just 12cm of sea level rise could see average premiums more than quadruple for about 1700 homes, the report estimates – if insurers fully priced the increased risk into policies. In Auckland, 540 homes were identified as being in the risk zone.

According to Stuff, at those levels, people may effectively find they have no insurance cover. Losing insurance would have knock-on effects for mortgages, because banks typically require borrowers to have insurance. Difficulty borrowing for home loans could in turn make properties hard to sell.

The Insurance Council says it expects companies would keep covering existing customers, at higher premiums and excesses, but might decline new customers in risky places.

MITIGATING RISK

So how can homeowners, or buyers, find out if their property, or one they are interested in, is in a high-risk natural disaster area?

First, read the property’s LIM (Land Information Memorandum) report, which has to outline known hazards, like floods, it might face. Check Google Maps to establish its proximity to potential hazards like waterways. Get a property inspector, structural engineer or climate risk assessment service to assess/identify issues.

Most councils should have relevant information on hazards and risks available for people to see what a property might face. The Commissioner for the Environment reports on, and has maps of, low-lying areas and rising sea levels. Organisations like NIWA and EQC can also provide information to help.

WHAT ARE YOUR OPTIONS?

■ Before buying insurance, find out the cost to repair, rebuild or replace your home after accidental damage. Include damage to retaining walls, pools, or tennis courts.

■ Get a policy that covers alternative accommodation costs, or loss of rent, if the house is unliveable.

THE BOTTOM LINE

According to a report by The Treasury – the Government’s lead economic and financial adviser – thinking about rebuilding costs is a new experience for most homeowners, who seldom know all the relevant information about their house. People can check with their insurers and banks what cover they provide and the tools available to help set an accurate insured value. One option is to use the free Cordell Online Calculator.