Residential, Lifestyle, Commercial and Industrial Property Valuers servicing the Hutt Valley

Residential (House) Insurance – How do you adequately assess Replacement Cost Cover?

FACT – “The world as we knew it has changed” for Residential (House) Insurance coverage within the New Zealand market (the upsidedownhousepathreuters485_19j4nbh-19j4nbvchange being as a result of the financial losses which Insurers have incurred following the Canterbury earthquakes).

While many may feel the change is not in the general public’s best interest; at least, “natural disasters” insurance cover is still available within the New Zealand insurance market (in some parts of the world, such cover is not obtainable, and the public go uninsured).

The media (and most Insurers) have done a pretty good job over the past year in educating us, as what the change entails; however, daily I am reminded that there is still a lot of confusion out there in the public’s minds (as to how to go about dealing with the new insurance approach).  Therefore, a lot of our time is spent trying to “fill in the gaps of understanding”, so that the public can make reasoned decisions, and understand what the steps they should take to find an answer that is right for themselves.

How do you assess the Replacement Cost for Residential Insurance?

The biggest misunderstanding (and pitfall) in my mind (created by Insurers “Default figures” and “On-Line mt-cook-fire-1200calculators”, where the indicated figures give the impression of “accuracy down to the tens, or hundreds of dollars”) is the fact that “Replacement Cost” is often incorrectly perceived to be “a figure limited to a narrow dollar range” (and, that there is an easy answer).

REALITY IS:  Imagine for a moment actually getting quotes to fully rebuild your property from several different builders; those quotes will very likely range over “many tens of thousands of dollars” (and in many instances, the range in those quotes could actually vary over “hundreds of thousands of dollars”).  The reality of a potentially VERY wide cost to rebuild range, is due to the fact that each builder will have their own costing schedule to cover profit, labour and materials. Now, if “Builders quotes” are likely to vary over a wide spread, how can you expect that there would be “one and only one” Replacement Cost figure, when assessing a figure for insurance cover.  Added to this is another factor that could further “widen” the potential rebuild cost range, this is the fact that there may be a range of scenarios around the assumed loss (where each could significantly alter the cost of rebuilding); ie as we don’t know the circumstances of the future loss, is it a single event (such as a fire) where we could expect to find a range of builders available to rebuild; or a catastrophic event (such as a major earthquake), where rebuilding could be significantly delayed, and where rebuilding costs could escalate significantly, and builders may not be as readily available.

ADDITIONAL ISSUE – WHAT YOU REBUILD, MAY NOT BE THE SAME AS YOUR EXISTING HOUSE:  Keep in mind property-value (if you have anything older than a house of very “recent construction”), when rebuilding after a “total loss” it is very likely that you “will not be rebuilding a house of exactly similar style” (the replacement will be at best, a “modern equivalent of your property”).

Why might the replacement structure be different? – this is because building methods and materials have changed over the years, and current building regulations are unlikely to permit an “exact replica” of your existing (earlier era) house (the most obvious example of this is that, modern construction will require “double glazing and full insulation”; things your current house may not have).

A recent newspaper article I read suggested several things:

  • Up to two thirds of home owners may be taking the Insurers “default figure” as the appropriate (?) level of  insurance cover (this is a serious issue, as the figure could be very wrong; and use of the default figure by so many, indicates a large group of the General Public who really may not understand the issues).
  • In a “cost saving” attempt (one I feel is driven by misunderstanding), some home owners are cutting the insured level back to a figure “lower than the default figure” (or, deciding not to carry sufficient cover for all the “extras”, like garages, fencing, paths and drive; or, are budgeting only sufficient to rebuild a smaller house) – what they often don’t realise is, that the “added premium cost for a little extra cover, really isn’t that expensive”; and the actual “savings” may be small, relative to the extra risk of “self insurance”, that they are in-effect adopting).

MY ADVICE IS take adequate cover “relative to your personal risk profile” (this means assessing the risk, and how you would weather a major loss financially);  extra insurance cover if taken, is likely not going to cost a lot, and “under insurance” (to save a few dollars in premium) carries significant risk factor – check with your insurers.

The steps available to you:

FIRSTLY; fully familiarise yourself with your particular insurance policy, look for things like “GST inclusion or exclusion”, “floor coverings inclusion or exclusion” (this is a change to some historical policies, where fitted floor coverings like carpets and vinyl were treated as a “contents policy item” and not a building policy item); check for items where the cover offered is excluded or “capped” at a lower level than the replacement cost (this might include special features, such as retaining walls, or swimming pools). If after reading your policy in detail you have any questions, go back to your Insurer, and get these clarified. Once you fully understand what your policy actually covers, you are then in a position to assess “how much cover you should hold”.

The first “guide” you receive is likely to be a figure assessed by the Insurer, we will call this the “Default figure”.  As the Insurer historically was likely to know very little about your property (basically often only its approximate size) the figure should be treated with “extreme caution” (I won’t say disregard it, but there is a lot of room for error – so first off, check any information which the Insurer has supplied, such as the floor area, as this could be the first point of error).  The “Default figure” is likely to be based on a basic building cost figure (this won’t cover building on sloped sections or more extensive housing).

The next approach being advised by many Insurers (and also often found on bank websites) are “On-line calculators” (these are found on their respective web sites).  To use them you have to be computer savvy, and know a few basic tax_collectordetails about your property (“guessing details”, like floor areas, won’t be good enough).  Start with your own Insurers web site first; and then try other On-line calculators for a comparison. I use these calculators extensively to assess “whether I can advise clients on their safe use”, and in some situations they give an adequate answer; BUT, it is easy to make a mistake in the button you press, or answer you give, and this can significantly change the end answer (one question answered incorrectly could result in an end answer not just varying by “tens of thousands of dollars”, but very possibly by “many tens, if not into the hundreds of thousands of dollars” difference).  Overall, I feel on-line calculators are definitely better than relying on the “default figure”, BUT they tend to give you a false impression of accuracy, and could lead you well astray (however for basic properties, when you aren’t in a position to get suitable professional advice, they may suffice).

When using an on-line calculator my advice is:

  • use more than one calculator,
  • do the calculation with each more than once
  •  be very careful on how you answer the questions
  • and be aware that the answer given, could be very wrong.   

THIRD APPROACH ON OFFER:

What can the Valuer provide?

Bill LindsayWhilst the Valuer still faces the situation where there could potentially be range in the “cost to rebuild” (due to different builders costings, and the cost to rebuild under the various different “loss scenarios”), the Valuer  is likely to have a better understanding of the costs of replacement building, and is better placed to advise clients on the level of suitable cover. I perhaps adopt a slightly different approach to some, in that I tell my clients that the Valuer’s input is not necessary in every situation;  it’s about you assessing the “risk profile” that you are comfortable with (if the Valuer can help you to take control of your situation, that’s what we are here for).

For this reason the main focus of my discussions with potential clients is not about selling the Valuer’s services, it’s about empowering you to take control of the insurance decision, by equipping you with the information you need to understand the problems, so you can make the right decision for your circumstances.

Summary:

This is a fairly brief rundown of a complicated subject; the “approach which is right for you” will depend on the nature of the property, your knowledge of computers, and building costs, and your perception of your risk profile (ie how much risk you are prepared to carry).  The Valuer’s input can be well worth the cost involved, for the peace of mind that it brings.

IF YOU HAVE A HUTT VALLEY PROPERTY AND ARE CONCERNED ABOUT INSURANCE COVER, CALL US FOR A “NO OBLIGATION” DISCUSSION TO ESTABLISH YOUR NEEDS .

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