A Better Understanding Of Property Insurance

At a point in time that we reflect, following two of the most major weather events to occur in Auckland and NZ ‘s history, I thought that a blog on house and/or commercial property insurance is worthwhile reading.

Clearly, under-insurance is a significant issue that can have serious financial consequences for the homeowner. The term underinsurance refers to a situation where the value of an insurance policy is less than the actual cost of rebuilding or repairing their home in the event of damage or destruction.

According to recent research, over 80% of homeowners in New Zealand are underinsured, with many underestimating the true cost of rebuilding their home. This can lead to financial loss in the event of a disaster such as a flood, fire, earthquake or cyclone/wind damage.
Another scary statistic is that the average NZ homeowner last reviewed their home insurance cover nearly 2.5 years ago!

Building Costs. 

2021 – 2023 has evidenced an industry-wide shortage of building materials and rising labour rates for builders, electricians, plumbers and finishing trades. The cost of building has of course skyrocketed which has been well documented by the media, in some cases rising by 30-35%. Naturally if a policy was not reviewed within the last year, the replacement value calculation will be well understated and not in step with current building costs and labour rates.

To assist our understanding of current building rates, I have referenced Liam Lyons, a well respected and experienced Registered Valuer, who has confirmed that for a modal home in Auckland (i.e. a standard weatherboard 3 bedroom bungalow of say 100m2) one should allow at least $3,500.00 per sqm plus GST.  As a general rule, luxury standard homes can be higher (say $4,000.00 – $5,000.00 per sqm plus GST) and if they are very large, the rate per sq metre can come down as costs are spread over a bigger floor area.

Extra costs. If an insurance policy is for full replacement value, then one needs to also account for the demolition costs of what remains, not just the house in some cases, but also retaining walls, pools, outdoor areas, etc if damaged in an event. These extra improvements and costs can be substantial.

Gross Floor Areas.
Many owners, or insurers, simply take the rating or Government Valuation recorded floor area as gospel. Unfortunately as we do not get a Govt. Valuer coming through the property once every three years any more (they used to do this around 25 + years ago), the recorded floor areas can become very inaccurate, particularly if there have been alterations completed over time, such as a rumpus room, conservatory built on, and so on.

An insurance company can only go on what is agreed on the policy and it is the responsibility of the policy holder to provide accurate information.  So if in doubt, check out the floor plans, or complete a physical measure, ensuring that alterations and changes are reflected and decks and other improvements are recorded.

Many homeowners make the mistake of assuming that the value of their home is the same as its market value. Research also indicates that around 40% of homeowners that have reviewed their home insurance typically leave it unchanged and 2% reduce it. Wow.

Calculating Replacement Values.
Most insurance brokers and insurance companies steer homeowners towards the calculator’s on their website, or cost calculation companies. Whilst these are better than making an arbitrary guess on building cost inflation, given the substantial value of dwellings and commercial investments today – often a result in a lifetime’s saving and ones largest assets, this is an area that deserves better attention to detail!
As most clients and colleagues know, I come from a Registered Valuation background. Hence this topic is very close to my heart and a “pet subject”.

Conclusion.
I am the first to concede that the whole topic of insurance is a sensitive topic right now. However it warrants the time and energy to get it right, particularly given recent events.
It is my first recommendation to use a well respected insurance broker. Secondly, not to rely on a “gut feel” or “best guess” on likely building costs and floor areas. Home cost calculation web-sites are only broad brush estimates. My final recommendation for your expensive asset is to spend the money and engage a real professional, such as a Registered Valuer, to complete an inspection, measure up the house accurately and provide some accuracy on its “true replacement cost”. Insurance companies love them.

As always, just reach out and ask for any guidance in this area – Ray White Lochore’s is here to help.