A shift to “sum insured” rather than current full replacement or reinstatement will require property owners to be proactive to ensure any building and improvements are adequately covered. Possibly a need to provide insurance certificates (or similar certification) to identify clearly the sum insured.
This is work typically prepared by a Registered Valuer. Historically insurance certificates have focused on commercial buildings. More recently there has been a trend towards providing insurance reinstatement estimates on high value homes as well (typically with improvements over perhaps $1,000,000 in value).
A valuers insurance certificate provides a number of insurance estimates:
- Reinstatement – which is defined as the cost of replacing or reinstating the asset with its equivalent in new condition, including, where appropriate, the use of current equivalent technology, material and services. In addition an estimate of an inflationary provision is given being the expected inflationary growth in those costs for the insurance period.
- Indemnity Value – This can be defined typically either as the depreciated value of the asset or alternatively the estimated market value of the second hand asset (excluding land). The figures may vary and which is adopted could depend on the wording of the insurance policy. This area is somewhat grey.
A wider general interpretation of indemnity value would be the estimated market value of the asset. In other words, in the event of a total loss, the insured would be covered to the market value of the improvements. These figures require a valuers input to determine as it is assessed using market data and methods. Consultation on the appropriate method of calculating indemnity value is needed.
The decision then needs to be made by the insured on whether to insure their asset on a full reinstatement basis or an indemnity value (market value) basis. This then becomes the “sum insured”.
The changes to insurance policies have important ramifications for home owners.
Owners will need to accurately value their asset to provide sufficient cover in the event of a total loss. The sum insured will be fixed for a precise amount. This gives some certainty to the insured but it is imperative there is adequate cover. This is best done by a valuer with appropriate experience, especially on larger good quality property or original character/period homes.
The owner can elect to only insure based on indemnity (or market) value. This may reduce insurance premiums but could leave a shortfall to the owner if complete reinstatement is needed. This type of cover could be used perhaps where an asset is old and rundown and may not be replaced in the event of a total loss, particularly where the underlying land value could be high and the site is more suited for redevelopment.
The big danger to home owners is making sure their fixed sum of cover is sufficient to adequately replace the asset. This is where a valuers input should be used. It is also very important this fixed sum is updated regularly (typically two years) to ensure the asset is covered.
See also Diana Clement’s NZ Herald article : Homeowners may be in for an insurance shock