Many Kiwis are unknowingly underinsured, leaving their dream homes vulnerable. The rising costs of construction, unforeseen natural disasters, and a lack of understanding about insurance policies all contribute to this concerning trend. This article delves into the hidden property insurance risks in New Zealand and provides actionable tips to ensure adequate coverage.
The Silent Threat: Underinsurance in New Zealand
Underinsurance means your insurance coverage wouldn’t be enough to completely rebuild or repair your home if disaster strikes. This is a far more common problem than many homeowners realize. Factors such as escalating building material costs, and the “optimism bias” (thinking “it won’t happen to me”) all contribute to homeowners insuring their homes for less than their actual rebuild cost.
A recent report highlighted that a significant portion of New Zealand homes are underinsured by an average of 20-30%. This percentage can translate into hundreds of thousands of dollars out of pocket when it comes time to rebuild after a major event. Think about the emotional and financial stress that adds on top of the trauma of losing a home. The key takeaway is to treat insurance less like a grudge purchase and more like the crucial safety net it truly is.
Understanding the ‘Sum Insured’ vs. ‘Market Value’
One of the biggest misconceptions around property insurance is confusing the ‘sum insured’ with the ‘market value’ of your property. Market value includes the value of the land your house sits on. As your land is unlikely to be damaged in any of the major events that can impact your home, its market value should not be the basis of your insurance. The ‘sum insured’ represents the total cost to completely rebuild your home to its previous condition. This includes demolition, material costs, labor, and professional fees like architect and council plan processing fees. If your insurance is based on your “market value”, you’ll soon find yourself significantly out of pocket.
Hidden Costs and Overlooked Factors
Several hidden costs and often overlooked factors can drastically increase the rebuild cost of your home. Ignoring these could lead to serious underinsurance.
Building Material Inflation
Construction material prices fluctuate significantly. When markets are stable it’s easy to forget the impact inflation can have on the true costs of rebuilding. These can drastically change from year to year and can be especially volatile after a large, damaging event that impacts vast sections of the country. Your policy needs to take into account that at any time, in the event of a claim, you will need enough money to rebuild in the current market.
Demolition and Debris Removal
The cost of demolishing a damaged house and removing the debris can be surprisingly high, easily running into tens of thousands of dollars. Old houses contain asbestos or other hazardous materials, the fees to remove these also need to be considered. Ensure your policy covers these costs adequately and doesn’t have hidden exclusions or low sub-limits.
Professional Fees
Engaging architects, engineers, surveyors, and other professionals is essential for a rebuild or major repair. Their fees can add a significant amount to the overall cost. Be sure your policy includes coverage for these professional fees. Additionally, factor in costs for getting plan consents from your council. Your insurance policy should be able to contribute to these expenses too.
Geotechnical Considerations
New Zealand is prone to earthquakes and landslips. If your property is in an area with unstable ground conditions, the rebuild might require expensive geotechnical work such as retaining walls or soil stabilization. It’s important to fully understand the potential costs associated with geotechnical concerns.
Code Compliance Upgrades
Building codes change over time. If you need to rebuild your home, you’ll have to comply with the current building codes, which might require upgrades to your home structure, electrical systems, plumbing, or insulation. These upgrades can be unexpectedly costly, especially for older homes. Make sure your insurance policy has a built-in upgrade clause to cover compliance costs. Many policies also only cover a certain portion of these extra costs, so carefully compare policies to ensure yours can match the true risk.
Unique Architectural Features
If your home has unique architectural features such as ornate cornices, intricate woodwork, or imported materials, these will be expensive to replicate. Make sure your insurance policy acknowledges and adequately covers these unique aspects of your dwelling. Keeping records of where you sourced any special materials during your build can also help streamline this process in the case of a claim.
Landscaping
Although many people don’t consider it, you must also factor in the cost of landscaping when determining your sum insured. Reinstating gardens, driveways, fences, and other outdoor features can add up to a substantial amount, particularly if you have extensive landscaping or mature trees.
Ways to Determine Your Rebuild Costs Accurately
To avoid underinsurance, it is vital to determine your rebuild costs as accurately as possible. Here are some strategies coupled with real-world examples.
Professional Valuation
Engage a qualified Quantity Surveyor to assess the rebuild cost of your home. They will consider all the factors mentioned above and provide a detailed estimate. This is a good (but potentially costly) first step, particularly before insuring new homes. Most banks also request a valuation before they decide to loan property owners large sums. Some insurance providers may also recommend you get a professional valuation.
Online Rebuild Cost Calculators
Several online calculators, such as those provided by Quotable Value (QV) offer estimates based on your home’s size, construction type, and location. While these tools can be helpful, they should only be used as a starting point, as they may not account for all the unique features of your home.
Reviewing Your Policy Regularly
At least once a year, review your insurance policy with your insurer or broker. Discuss any changes to your home, such as renovations or extensions, and adjust your sum insured accordingly. Keep abreast of inflation or market volatility that may be present. This regular review should be a mandatory aspect of managing your property effectively.
Consulting with Builders
Talk to local builders to get a sense of current construction costs in your area. They can provide valuable insights into material prices, labor rates, and other expenses associated with rebuilding. Some insurance providers may also be able to arrange for an appraisal from a builder that they trust.
Natural Disasters and Coverage Considerations
New Zealand is prone to earthquakes, floods, and other natural disasters. Understanding how your insurance policy covers these events is crucial.
Earthquake Commission (EQC) provides natural disaster insurance for residential properties. EQC covers damage to your house, land, and essential services like water and sewage. However, EQC has a cap on the amount it will pay out, and it doesn’t usually cover contents. Therefore, you need private insurance to cover costs exceeding the EQC cap and to insure your belongings.
Flood Zones and Flood Insurance
If you live in a flood-prone area, ensure your policy explicitly covers flood damage. Some policies have exclusions or sub-limits for flood damage, so read the fine print carefully. Understanding the specific risks in your area and ensuring your policy addresses them, is a fundamental component of good risk management.
Landslip Coverage
Landslips can cause extensive damage to your home and land. Check that your policy covers landslip damage and includes the cost of repairing or stabilizing the affected land. Again, clarify the limits and exclusions related to landslip coverage within your policy.
Common Insurance Policy Exclusions and Limitations
Insurance policies aren’t always straightforward, and they often contain exclusions and limitations that can catch homeowners off guard. Be sure to know what is and isn’t covered.
Wear and Tear
Most policies don’t cover damage caused by normal wear and tear. For example, if your roof leaks due to age, the repairs might not be covered. Insurance is intended to cover sudden and accidental damage, not gradual deterioration. It’s important to invest in regular maintenance to prevent these sorts of issues.
Unoccupied Homes
If your home is unoccupied for an extended period, your policy might become invalid or have reduced coverage. Check the terms of your policy regarding vacancy clauses. For example, if you are travelling overseas, or have several homes, you may need a separate policy covering unoccupied homes.
Poor Maintenance
Damage resulting from poor maintenance is often excluded. For example, if you fail to maintain your gutters, and this leads to water damage, your claim could be denied. This provides another reason to invest in regular home maintenance.
Pre-Existing Conditions
Insurance generally doesn’t cover pre-existing conditions. If your home has structural issues that were present before you took out the policy, any damage resulting from these issues will likely be excluded.
Case Studies: Real-Life Underinsurance Scenarios
Understanding the impact of underinsurance is best illustrated through real-life situations.
Case Study 1: The Auckland Apartment Fire
A fire broke out in an Auckland apartment building, causing extensive damage to several units. One homeowner had insured their apartment for its market value, which was significantly lower than the cost to rebuild. After EQC payout, they still had to pay a substantial amount out-of-pocket to restore the apartment to its original condition. The lesson is to ensure the sum insured covers the actual rebuild costs, not just the market value. While the apartment had a market value of $700,000, rebuild costs were closer to $900,000 due to the expense of labour.
Case Study 2: Canterbury Earthquake Claim
Following the Canterbury earthquakes, many homeowners discovered they were underinsured. One family’s home was severely damaged, and their insurance policy didn’t cover the full cost of demolition, debris removal, and rebuilding to current building code standards. They were forced to take out a second mortgage to bridge the gap, causing immense stress and financial strain. Their old home was insured for $350,000, but the quotes to rebuild ranged from $500,000 to $600,000.
Case Study 3: The Wellington Landslip
A Wellington homeowner experienced a landslip that undermined their home’s foundations. Although they had insurance, their policy had a low sub-limit for landslip coverage. The cost of stabilizing the land and repairing the foundations far exceeded the sub-limit, leaving them with a significant shortfall. Land stabilisation costs rose to an eye-watering $400,000, while the insurance policy only covered $250,000, indicating the large gap that can occur. In high-risk locations, homeowners need to understand that this type of event is more likely, and they need the correct insurance to address the risk.
Choosing the Right Insurance Policy
Selecting the right insurance policy requires careful research and consideration if you want to avoid becoming a case study yourself.
Comparing Different Policies
Don’t just settle for the first policy you find. Compare quotes and coverage from multiple insurers. Pay attention to the policy wording, exclusions, and limitations. It’s important to compare like with like – often the cheapest policy has major coverage gaps!
Understanding Policy Wording
Insurance policies can be complex. If you don’t understand something, ask your insurer or broker to explain it in plain language. Don’t be afraid to seek clarification on any ambiguous terms or conditions. You can ask the insurer for a draft copy of their policy for review before you agree to signing up with them.
Working with an Insurance Broker
Consider working with an insurance broker who can help you find the right policy based on your specific needs and circumstances. Brokers have in-depth knowledge of the insurance market and can negotiate on your behalf. They can also act as your advocate in the event of a claim.
Reviewing Your Policy Annually
As discussed above, your insurance needs can change over time. It’s usually best to review your policy annually and whenever you make significant changes to your home.
Adjusting Your Sum Insured
As inflation and construction costs increase, ensure your sum insured is adequate to cover the current rebuild costs. Don’t just assume your existing coverage is sufficient. You may wish to choose a policy that can increase by a certain level each year in accordance with the rate of inflation.
Updating Your Home Inventory
Keep an up-to-date inventory of your home’s contents. This will help you accurately assess your contents insurance needs and streamline the claims process if something happens to your items. Taking photos or videos of your items can also reduce insurance complications. Receipts are another invaluable source of information in the case of a claim.
Navigating the Claims Process
If you ever need to make a claim, knowing how to navigate the process can make a big difference.
Documenting the Damage
Take photos and videos of the damage as soon as possible after an event. This will provide valuable evidence to support your claim. Don’t dispose of damaged items until your insurer has had a chance to inspect them.
Contacting Your Insurer Promptly
Notify your insurer as soon as possible after the event and provide them with all the necessary information they require. The sooner you make contact, the sooner they can begin to assist.
Keeping Detailed Records
Keep detailed records of all communication with your insurer, including dates, names, and summaries of conversations. This will help you track your claim’s progress and address any issues that arise. It is also important to keep all receipts and expense claims when it comes time to claiming.
The Role of EQC in Property Insurance
As mentioned earlier, the Earthquake Commission (EQC) plays a vital role in providing natural disaster insurance in New Zealand.
EQC Coverage Limits
EQC has a cap on the amount it will pay out for damage to your house and land. EQC cover is currently capped at $300,000 + GST for damage to your house and $20,000 + GST for damage to your land. However, it is important to note that the caps can and have changed in the past.
Relationship with Private Insurers
EQC works in conjunction with private insurers. If the damage exceeds the EQC cap, your private insurer will cover the additional costs up to your sum insured. However, it’s important to note that EQC applies a deductible, therefore the combined payout from EQC and a private insurer may not cover the total costs of damage. This is especially true for large earthquakes.
It can therefore be argued that EQC effectively acts as a deductible for private insurers. Therefore the EQC coverage needs to be considered when deciding what level of private insurance is required.
Understanding EQC Exclusions
EQC has some exclusions, such as damage caused by gradual settlement or pre-existing conditions. Familiarize yourself with these exclusions to avoid disappointment when making a claim.
The Future of Property Insurance in New Zealand
The property insurance landscape in New Zealand is constantly evolving. It is likely that extreme weather events and climate change will require greater investment in property insurance than ever before.
Climate Change Impacts
Climate change is increasing the frequency and severity of extreme weather events, such as floods and storms. This could lead to higher insurance premiums and increased risk of underinsurance. It also has the potential to create pockets of uninsurable areas through the country.
Technological Advancements
Technological advancements, such as drone inspections and AI-powered risk assessments, could improve the accuracy of rebuild cost estimates and streamline the claims process. These developments could also result in more granular insurance payouts where digital tools make it easier to identify and address areas of damage.
Sustainable Building Practices
Sustainable building practices, such as using eco-friendly materials and energy-efficient designs, could reduce the risk of damage from natural disasters and lower insurance premiums. Building standards are constantly being adjusted in order to ensure properties are built up to code.
FAQ Section
Here are some frequently asked questions about property insurance in New Zealand:
What is the difference between ‘replacement value’ and ‘indemnity value’?
Replacement value covers the full cost of replacing damaged or destroyed items with new ones. Indemnity value only covers the current market value of the items, taking into account depreciation. Replacement value is generally recommended for contents insurance to ensure you can replace your belongings with new equivalents.
How often should I review my insurance policy?
You should review your policy at least once a year and whenever you make significant changes to your home, such as renovations or extensions. Additionally, it’s important to reassess your coverage after major life events, such as purchasing new valuables or starting a home-based business.
What should I do if my insurance claim is denied?
If your insurance claim is denied, first ask your insurer for a written explanation of the reasons for the denial. Review your policy carefully to understand if the denial is valid. If you believe the denial is unfair, you can lodge a complaint with the Insurance & Financial Services Ombudsman (IFSO) or seek legal advice. There may be clauses present in your agreement that need further review.
Does EQC cover land damage caused by all natural disasters?
EQC covers land damage caused by earthquakes, volcanic eruptions, landslips, hydrothermal activity, and tsunamis. However, it doesn’t cover land damage caused by flooding, storms, or erosion, which are generally covered by private insurance (if your policy includes these).
What is an ‘excess’ in an insurance policy?
An excess is the amount you have to pay out-of-pocket when you make a claim. Choosing a higher excess can lower your premiums, but it also means you’ll have to pay more if you need to make a claim. It’s usually best to choose an excess amount that won’t cause you pain.
References
- Earthquake Commission (EQC) official website
- Quotable Value (QV) website
- Insurance & Financial Services Ombudsman (IFSO) website
- Various reports on underinsurance in New Zealand by industry experts
Don’t let underinsurance turn your Kiwi dream home into a nightmare. Review your property insurance policy today to make sure you have the right level of coverage. Contact your insurer or seek advice from an independent insurance broker to assess your needs. Proactive management of your insurance needs can offer great peace of mind. Take this crucial step now to protect your home’s future. Because while you can’t prevent a disaster, you can certainly prepare for one.
