House Insurance by Construction Cost Consultants

New Data Indicate Widespread Shortfall

in House Insurance

by

Construction Cost Consultants

The way we insure our most valuable asset, our home, has changed. Just over a year ago, insurance companies shifted to the “total sum insured” approach to house insurance.

Under this new system a home is no longer insured for its replacement value based on the square meterage of the property, instead the onus now resides with the property owner to calculate an accurate figure which would pay for the rebuild of a home if it was destroyed.

Insurers now provide a default sum in policy documents, with a caveat that policyholders should conduct their own review for accuracy. They may accept the default sum or specify a new one, and premiums may be adjusted accordingly. On average, every additional $50,000 worth of cover beyond the default sum costs around $75.

The risk is that the default sum will be insufficient for the full cost of rebuild, and new data indicate that this is often so. Construction Cost Consultants (CCC), a firm of professional quantity surveyors, has produced over 30,000 insurance reports based on elemental surveys of residential properties and compiled hard regional data into a report that illustrates the gap between the default sum and the actual cost of rebuild.

The report, based on 2,000 rebuild valuations completed in the Auckland region in 2013 and 2014, shows that for each $100,000 band of rebuild value between $300,000 and $2 million, the average construction cost for each band is not relative to the default sum provided by each insurer.

Given that between 75%, and 80%, of those with house insurance are currently opting for the default sum, an estimated $167 billion worth of residential property is currently not insured for rebuild.* The shortfall for those insured for the default sum is estimated at 25%, to 50%, depending on the home’s features and the presence of more complex elements such as retaining walls.

The good news is that banks and insurers are addressing the evident shortfall between what their customers are insured for and the true cost of full rebuild if the worst happened. The calculations made by providers to reach a default sum for each customer is simple, but there is no consistency of metrics, definition or measurement. As a result, square-metre rates used to calculate default sums range from $1,850 to $2,300, depending on the insurer.

The insurers CCC works with have advised that they will recalculate their square-metre rates to produce a higher default sum for customers from the first anniversary of the new guidelines on 1 July 2014.

Those working in the sector say that banks and insurers recognize that it’s in their own interests to ensure that customers have comprehensive cover, and that the increase in premiums that will result from a higher default sum – unless the customer opts to lower the sum insured, which they are allowed to do – will be balanced by a more accurate degree of coverage in the event of loss.

The construction cost on which rebuild valuations are calculated includes:

  • Demolition;
  • Professional fees;
  • Building consents;
  • Construction costs;

o Building structure;

o Building envelope;

o Internal finishes;

o Driveways, paths and patios;

o Decks, balconies and verandas;

o Swimming pools, spas and any other recreational features;

o Fencing;

o Retaining walls;

o In-ground services and drainage.

  • Builder’s profit.

The GFA (gross floor area) is the useable floor area of the property, including garages if attached to the main residence. This is measured to the outside edge of the wall element. The GFA does not include outbuildings, sheds, decks, patios or detached garages.

The results of the 2,000-property report confirm that:

  • The smaller the property, the larger the $/m2 rate;
  • The larger the property, the smaller the $/m2 rate;
  • The average construction cost for each band is not relative to the default sum provided by each insurer;
  • The larger the value of rebuild, the larger the $/m2 rate.

Different types of professional property assessments are available to achieve accuracy in the sum insured. Quantity surveyors specialize in construction cost assessment, in which they receive a minimum of four years’ training. Many quantity surveyors will provide insurance backed warranties and guarantees of their insurance reports for a set period, and have professional indemnity insurance. Homeowners are advised to request evidence of these measures before proceeding with an assessment for insurance purposes.

*Based on a 25%, national underinsurance estimate, the number of private dwellings (1.765 million) and the median national house price ($407,525).[1] (The full value of housing is more than $717 billion).

Construction Cost Consultants

www.costconsultants.co.nz

0800 422 58

mhorgan@costconsultants.co.nz

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[1] New Zealand population data October 2013 (Statistics New Zealand); REINZ newsletter November 2013.