Low insurance value

Question from John updated on 24th December 2014:

Our expert Leanne MacKenzie responded:

For the purpose of this question I will assume “building” means a dwelling/residential flats and not a commercial building. Replacement (rebuild) value is quite different to market value. Factors like age and design of the dwelling, slope of the land and location are considered when calculating rebuild costs (and therefore the sum insured). Market value is driven by demand/supply in the area.  For example, two dwellings are identical in every way, but one is in central Auckland and the other is provincial. While the rebuild costs (and therefore sums insured) should be the same, the market values would vary due to location.
Setting the sum insured correctly is extremely important as it’s the maximum payable should a total loss occur. Something else to consider is what happens in the event of a partial loss, where the home is not written off and the damage can be repaired? Say if a fire destroyed two thirds of your building, would the $150,000 be sufficient to repair the damage? Insurers have to take partial losses into consideration when setting the sum insured as they must carry the exposure for all partial loss claims such as impact damage, burst pipes, storms and floods. Also, repairing damage around an existing structure can sometimes be more expensive than starting from scratch. Of course they also still carry the exposure for the dwelling as a whole. Check with your bank also as to what insurance is required.
It will be very difficult, if not impossible, to find an insurer who will provide the level of cover you require as this would probably be considered blatant underinsurance. To keep costs down while insuring the building correctly, your options to consider include taking a “restricted” type policy (only covers specific events e.g. fire, storm, flood, etc.) or a higher policy excess. If your policy is exclusive of GST, by deducting 15% from the sum insured the premium will be calculated on a smaller amount but won’t compromise the amount of cover. A reputable insurance broker will be able to provide advice and solutions for tricky situations like this one.

Leanne MacKenzie has over 25 years experience in the New Zealand personal property insurance industry. As personal lines manager for Crombie Lockwood she has been instrumental in introducing the important changes that have been made in the sector over the last 12 months. “Every property owner owes it to themselves, as a landlord and a homeowner, to understand the new regime.” Leanne is based in the company’s national office in Auckland.

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