The recent earthquakes are making big changes to house insurance. Chances are you have been asked by purchasers of a property about recent changes to the way homes are insured and about getting insurance following the earthquakes.  It is really important to be up to date with the situation so you do not get caught out giving wrong or out of date advice. If that advice is relied on, then you could be up for damages if a purchase goes sour or the insurance cover is not enough to fix any damage.

Generally in New Zealand, homeowners current insurance will be full replacement based on the square area of their home.  The majority of insurance providers are no longer offering replacement insurance and when homeowners policies are up for their annual renewal (or when they purchase a new property) their policy will change to a maximum sum insured value.

As agents dealing with property on a daily basis, it is crucial that you understand how things have changed.

Replacement insurance vs sum insured

To explain the difference:

Replacement insurance means in the event of the property being destroyed or damaged, the insurer will replace the property to the square meterage provided when the policy was taken out, regardless of the cost of rebuilding.

Sum insured insurance means in the event of the property being destroyed or damaged, the insurer will only replace the home UP TO the value it has been insured for.  If it costs more to repair or rebuild the property than the sum insured, then the insurer will not rebuild the property to its current state.

It is essential that when setting up home insurance for a new property, purchasers are advised to do their own research and ensure the value adequately reflects the likely cost of rebuilding their home, otherwise they may well find themselves in a position of not being able to reinstate their home to its current state if disaster strikes.

Things homeowners need to consider when assessing their Sum Insured value

There are many things to consider when calculating the sum insured value for a property:

  • Whether the land is flat or on a slope (the cost of rebuilding on flat land is much lower).
  • The year the property was built.
  • Floor area (including all levels).
  • Construction and roof type.
  • Demolition costs and site preparation (after the Christchurch earthquakes the demolition costs were much higher than estimated).
  • Include any outbuildings, garages, decks and fences.
  • Driveways and paving.
  • Retaining walls.
  • Special characters.
  • Private utilities (spa/swimming pools, tennis courts, solar heating, saunas, jetties etc).
  • Professional fees for rebuild or repair could be higher than expected.
  • Compliance fees to Council etc.

Retaining walls and some private utilities may be covered by insurance policies up to a maximum value, however some insurance providers do not automatically cover retaining walls and many private utilities (see above) and these need to be named on the insurance policy. Homeowners should read their policy thoroughly, and check with their insurer if they are unsure. They should get any confirmation in writing and keep it somewhere safe for later reference if necessary.

Timing when purchasing a property

All banks require insurance to be in place before they will lend any funds pursuant to a mortgage.  In the past, insurance was often organised after confirmation of any finance condition in an Agreement for Sale and Purchase and forwarded to the bank by the lawyers before the mortgage funds were drawn down (close to the settlement date).

Many lawyers and brokers are now advising that purchasers organise their insurance as part of their finance condition, to ensure that the level of cover they are offered is sufficient to the bank. They will therefore only confirm their finance condition once their bank has confirmed it is satisfied with the amount of cover.  This is to ensure that purchasers do not get caught in a situation where the day before settlement the bank advises them that their insurance is not adequate and they therefore cannot draw their mortgage funds and consequently cannot settle.

The recent earthquakes in the Marlborough and Wellington regions have also caused some changes to the way insurers are dealing with new policies, which reinforces the need for purchasers to ensure they can get adequate cover BEFORE they confirm their finance conditions.

It is important as agents to be aware of both the changes to insurance and the advice that is being given in the market, to ensure that you can give up to date and practical assistance to both vendors and purchasers and ensure that settlement is not delayed.