Check your house cover ‘sum insured’
OPINION: It’s time for homeowners to have a serious think about the sum they have insured their homes for.
When people take out house insurance, the nominate a ‘‘sum insured’’. This is the maximum amount an insurer has to pay when the insured home is damaged or destroyed.
Homeowners who set it too low risk not having enough money to repair, or rebuild their home in the event of a disaster.
It’s important to check your sum insured each year, and this year, it is especially important as the cost of building a home has risen in the region of 21% in just 12 months.
That’s the shocking result of a number of things, including Covid-19, the ramping up of building work, and successive governments’ failure to ensure we have a competitive market for building supplies.
Yes, just as inflation is eroding households’ spending power at a rate not seen in the better part of four decades, homeowners have to insure their homes for more.
That means higher premiums, though homeowners can lift their excesses, which can help offset the rise.
Once upon a time, insurers were happy to sell total replacement policies, and we homeowners did not have to nominate a sum insured.
But then the Canterbury earthquakes revealed they had woefully underestimated their actual risk.
So, if the insurance company experts couldn’t model risk, we the homeowners must bear the risk. The result was a switch from total replacement policies to the current sum insured policies for most homeowners.
Each year, we are expected by our insurers to use one of the online calculators provided by insurers to get an estimate of what it would cost to rebuild our homes.
The calculators bear legal liability waivers. If the estimates turn out to be too low, we can’t sue the companies providing them, or the insurers who promote them to us.
Using the calculators takes some doing, but as a person’s home is usually their largest asset, once a year, they should dutifully plug the vital statistics of their homes into the calculators, to get an updated estimate.
The calculators require a bit of effort, and the alternative, insurers say, is to pay a professional to get an insurance valuation.
It is easy to underestimate how much your house would cost to replace, especially as it should take into account special features, and retaining walls.
The sum insured should also be set high enough to include things like: demolition costs, council fees and consents, and professional fees.
For most claims made in ordinary years on house insurance policies, the sum insured does not matter hugely. It’s only when a home is very badly damaged, or destroyed, does it matter.
Then, a sum insured that is too low leaves homeowners facing building a smaller home, or finding the money to rebuild their home to the same size, and quality again.
Time and time again events like wildfires overseas have indicated many people find out to their cost that they have selected a sum insured that is too low.
The New Zealand Treasury Te Tai hanga has warned of this risk here.
Insurers do have systems to spot unusually high, or low, sum insured, and should be alerting homeowners.
But it is worth homeowners spending half a day a year before their renewal date checking whether the sum their home is insured for is high enough.
It can be daunting, so many homeowners will opt to call their insurer to talk their options through, including the cost implications of lifting the amount they insure their homes for.