Diana Clement: Make sure your house is valued properly

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Home insurance policies have been rewritten thanks to Canterbury quakes - and not in policy holder's favour

The policies are pages bigger than before, with even more fine print. Photo / Getty Images
The policies are pages bigger than before, with even more fine print. Photo / Getty Images

Have you renewed your home insurance policy lately? Did you need a small mortgage to pay the bill?

Most people realise that home insurance is changing. They just don't realise how radical the changes are.

It's not just the change to sum insured cover, which is momentous enough. Many home insurance policies such as mine with AMI have been totally rewritten thanks to the Canterbury quakes - and not generally in the policy holder's favour.

The outside of AMI's 2012 and 2013 Premier House Cover documents look exactly the same and you'd be forgiven for assuming that not much had changed. Read the two and they're almost totally different legal documents.

My latest AMI Premier House policy is a whopping 17 pages of carefully worded fine print, compared to only nine pages last year. That's a lot of extra words and in insurance every word matters.

Vero's newly reworded Residential Home Policy has swollen to 30 pages.

Many readers have been horrified at the 2013 premium increases. Mine didn't look that bad when it came through. The trouble was that the default sum insured I'd been sent wouldn't have been enough to rebuild much more than half of my house had it been destroyed.

I plugged my house details into the Need2Know calculator from AMI's parent company IAG and it spat out a sum insured figure 73 per cent higher than the default one on my renewal form with a $300 increase in premium.

That wasn't the end of the story. I then did what most Kiwi home owners should do and booked an insurance valuation, which can be done by a quantity surveyor, property valuer or builder.

The importance of having the sum insured correct can't be overstated. Come a total loss claim following a fire, earthquake or other disaster and the maximum the insurance company will pay is the sum insured. The payout may even be less if the insurance assessors determine that the replacement cost is less than the sum insured that you've been paying premiums on.

A valuation will give you an accurate assessment of what it would actually cost to replace your house. It's also harder for the insurance companies to argue with a quantity surveyor's report than it is a figure plucked out of the ether using their online calculators. It's not always easy to answer all the questions accurately unless you understand building and construction thoroughly.

My report from CQS Services by a qualified quantity surveyor identified that a rebuild would be nearly $300,000 costlier than the Need2Know calculator estimated - in part because the building materials used in my house were of a higher calibre than I realised. I found, as well, thanks to several conversations with AMI's helpline staff, that the details held on file about my property weren't accurate.

The new sum insured meant an 84 per cent jump in insurance premium compared to 2012 - for what could be argued to be more limited cover on exactly the same house. That's going to translate very nicely on to parent company IAG's bottom line.

The insurance companies say some people's premiums have gone down. I've yet to meet one of those people. Unsurprisingly the Insurance and Savings Ombudsman Scheme has been inundated with calls from confused policy holders about the sum insured changes and the ombudsman has published a document [tinyurl.com/suminsured] on the subject.

I dread to think how many Kiwis are simply accepting the default sum insured on their policies. AMI's head of corporate affairs, Craig Dowling, says default sum insured figures are a "starting position from which the homeowner can consider the most appropriate amount, and a default position to ensure a homeowner is not left completely uninsured".

All homeowners should get a professional valuation done - even if the fee adds another $400 to $500 on top of this year's shocker of a premium. You won't need to do another for seven to 10 years, says Mike Price of CQS Services.

Owners also need to be aware of the value of their retaining walls and "recreational features" such as swimming pools and tennis courts, which only get minimal cover unless specified. Retaining walls are limited to $20,000. I couldn't have worked out myself the replacement value of my retaining walls without Price's assistance. I'd assumed that they were "minimal" in insurance-speak. Price described the internal walls in his report as "extensive" and gave a breakdown of the replacement cost so that I could specify them.

Policy holders could be forgiven for wanting to pay their premium and be done with it. Reading the document brings more stress, however. My new more weighty AMI policy has big, bigger and sometimes gigantic changes throughout the document. For example, the explanation of demolition in last year's policy took 22 words. Now it's over 130 and has new clauses such as the removal and storage of household contents during the demolition.

Just how important words can be is highlighted in Vero's 2013 policy, which adds the words "we deem" to its definitions. Anyone with its 2013 policy who wants to claim for market value of their house will find that their policy now says that Vero can "deem" the amount needed to compensate them. No longer can they argue that the insurance company's valuation is too little because Vero has the right to "deem" the amount.

In this uncertain time where the new policies haven't been tested in courts, it's a good idea to use a broker who can go into bat on your behalf. They understand the policies and can help avert mistakes. Farzana Sakkai, property insurance manager at The Insurance Group, has a process to ensure home owners don't make mistakes. The process she explained would have picked up the mismatch between the reality of my property and the details held by AMI. Until this year those details would have been "largely immaterial", says Dowling.

"It is the small things in insurance that make a lot of difference," says Sakkai. Little words cost some Christchurch home owners hundreds of thousands of dollars each.

Readers who own villas or other heritage properties might have palpitations over their new policy wordings. Vero's 2012 open-ended replacement policy made no reference to "heritage features". The 2013 policy makes it clear that heritage features do not need to be replicated. It spells out that the company only needs to rebuild to "a building standard or specification similar to ... the home's condition when new, using currently equivalent techniques and building materials readily available in New Zealand. It does not require heritage features to be replicated exactly or at all."

AMI will only rebuild my house "to a condition as similar as possible". That means I can kiss goodbye to my beautiful pressed metal ceilings if the house has to be rebuilt. And when it comes to "flood", policy holders are not covered under Vero's new policy if their property alone is affected.

These changes are just some of the many. Homeowners need to read their policies, says Sakkai, to familiarise themselves with their new cover.

AMI and Vero are not alone in making radical wording changes. All house insurance policies have changed to sum insured cover other than those from Medical Assurance Society (MAS) and Farmers Mutual Group (FMG). All mainstream insurers have either changed their wording already or will be doing so in the near future.

You will find some policy wording changes that benefit home owners. For example, Christchurch red zone owners found themselves in a Catch 22 situation when they couldn't rebuild on the same site. Many policies now offer options of buying or building elsewhere instead of just the same site. At the other end of the scale, if my house keys are stolen, lost or illegally duplicated, I can now get up to $1000 instead of $250.

The new wordings haven't been tested yet by the courts or complaints heard by the Insurance and Savings Ombudsman's scheme, says Sakkai. That will come once claims are declined and the insurance companies exercise their interpretations of the wordings.

- NZ Herald

Diana Clement is a freelance journalist who writes about personal finance and careers. She has worked as a journalist for more than 25 years in both New Zealand and the UK. Diana has contributed to a large number of local and international publications. Her pet topic is the secrets of saving money.

Read more by Diana Clement

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