Market value policies

Question from Lance updated on 8th March 2014:

Our rental property was entirely destroyed by fire. We had a "market value" policy which "means the market value of an item immediately before it was lost or destroyed". The insurance company brought in a valuer who valued a replacement building of the same size at $153,000. Being an older building, they deducted 60 years of depreciation at 1% per annum or $91,800 leaving $61,200 plus an allowance of $25,000 for improvements to give a total of $86,200. With the property let at a market rate of $275 per week, should the "market value" of the item destroyed be that which produces the equivalent market rental for this location i.e. $275?

Our expert Leanne MacKenzie responded:

At claim time, market value policies generally make a deduction for wear, tear and depreciation of the structure of the home. However this depends on the policy definition of “market value” and also the basis of settlement within the policy wording.
Unfortunately, as you have discovered, market value policies can be a costly exercise in the event of a total loss, because as the home ages, the amount of depreciation etc can also increase and become very high.
In comparison, replacement value home policies do not deduct wear, tear or depreciation, so in a total loss situation (and assuming the sum insured is sufficient), the insured should be able to rebuild a comparable home, and therefore attract a similar rent again.
The question itself seems to suggest that the reinstatement or repair of the home should provide a guarantee on what rental amount can be obtained. There are many variable factors which drive rental income, but what you might receive comes down to what you ask for and what someone is willing to pay at that time. Regardless of whether you insure for market or replacement value, rental income is a separate issue with no relevance to the sum insured of the home.
Please note some policies do include a loss of rent benefit (some for free but some charge additional premium), which reimburses rent lost due to an insured event. If your policy included (or you purchased) this benefit, you may still be able to claim for rental income lost between the fire occurring and the claim settlement.

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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