Until recently, most New Zealand home insurers based their insurance premium amount on the floor area of homes. This means that homes having similar floor area in the same geographical location would be covered to more or less the same extent. This system failed to take into consideration the fact that despite these similarities, the cost of rebuilding different homes may require widely varying sums of money. The Canterbury earthquakes were an eye opener of sorts for the insurance industry and they prompted a significant change here. It is now up to the home owner to provide an accurate sum assured for his/her home, based on which the insurance coverage will be determined.
Providing an accurate sum assured value
Given that your entire home insurance will depend on the sum assured you provide, it is evident how critical it is to make sure this figure is accurate. Provide a sum assured figure that is too low and your home might end up significantly under-insured. Give a very high figure and your recurring cost, in terms of premiums, goes sky high. Finding the right balance here is very important for you, the home owner.
What you should know about the sum assured calculation
The very first point to know is that the insurer may give you a default sum assured calculation for your home, but it is necessary to verify that this value is accurate. Use an online calculator to figure out the sum assured on your own or hire the services of a professional to do the job for you. If there is a wide variance between your sum assured and the insurer’s, let him/her know that you would like your sum assured to be the basis of the insurance coverage. Also, keep in mind that different insurers may come up with different sum assured amounts, so if you are switching policies from one to another, this is a critical area for attention.
Covering the total cost of rebuilding your home
One of the important factors to keep in mind when calculating the sum assured is that it should cover the cost of rebuilding the home if a disaster completely destroys it. Here, you should factor in the cost of restoring your home to its previous state, which means you add in the cost of rebuilding your pool, car deck, garden, fencing, driveway, and so on. If your home has been designed with special finishing, add in the cost of materials/labor to recreate the same look and feel. You may also need to hire a professional designer or architect to help recreate the original design of your home, and the cost of hiring them should be added to the sum assured, as well.
One of the factors that is most often overlooked is the cost of demolition. Even if your home has been totally devastated by a disaster or accident, you will still need to call in demolition professionals to ready the site for fresh construction. This is a significant cost item that should be covered by your home insurance.
Assuming that the market value of your home is equal to the rebuilding cost is another very common mistake that many New Zealand home owners make, with disastrous consequences. Market value will include the value of the land that your home is built upon, but your insurer will not cover for the land when you take a homeowner’s coverage.
Also, remember that the cost of rebuilding your home may change from year to year, so it is necessary to carry out an annual review and tweak your home insurance so that your home is covered satisfactorily.