Insurers are relaxing tough rules — good news for homeowners who underestimated rebuild costs.

Two insurance firms are offering homeowners limited open-ended cover for fire damage.

Buying house insurance is a minefield, thanks to the Christchurch earthquakes. It's estimated by CoreLogic, the property data company, that nearly half of Kiwi homes are under-insured.

Some homeowners could be under-insured by hundreds of thousands of dollars, according to the firm, quantity surveyors and cases that have already been heard by the Insurance & Savings Ombudsman.

As many as 750,000 Kiwi homeowners, according to CoreLogic, risk being unable to rebuild a home of the same quality, or not at all, should the house be destroyed.

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Almost five years on from the first Canterbury earthquake on September 10, 2010, a glimmer of light has appeared, with a small number of insurers inching back towards the old-style replacement policies.

Starting to thaw

Before the earthquakes, most Kiwi homes were insured for open-ended replacement cover. They had only to provide a square metre figure and their insurer promised to rebuild the same size house to a similar standard whatever the cost.

Post 2011, almost all New Zealand insurers were forced by their overseas-based reinsurers, which control funding, to limit cover to a sum insured provided by the policyholder.

Only two, FMG Insurance and MAS (Medical Assurance Society), continued to provide open-ended cover.

Over the past 12 months two companies have introduced insurance policies offering limited open-ended cover. The first, Tower, announced 11 months ago that it would offer full replacement cover for houses destroyed by fire — the main cause of total losses in homes after natural disasters.

Fires don't destroy entire cities in the way that earthquakes do and a house burning down is a reasonably rare event, meaning Tower's reinsurers were willing to accept this extension.

Vero followed suit offering open-ended replacement for all claims other than natural disaster. It also offers 10 per cent "Sum Extra" cover over and above the sum insured for homes damaged or destroyed in a natural disaster. Vero chief executive Gary Dransfield says the 10 per cent doesn't reflect how much Vero considers clients might be under-insured by. Rather it is the limit that Vero's reinsurers would allow it to go to.

Under-insurance

Nearly half of Kiwi homes are under-insured by more than 10 per cent, according to CoreLogic. Some, says Richard Deakin, client director at CoreLogic, are hundreds of thousands of dollars under-insured, not just 10 per cent.

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Deakin says insurance companies add a margin each year for inflation, but international experience shows that these on average are 16 per cent inaccurate after three years and 25 per cent by five years.

When under-insurance is most critical, says Virginia Douglas, manager of legal and financial services at the Insurance and Savings Ombudsman, is in the case of the home being destroyed, which is when you need your insurance to pay out in full. Too many homeowners, says Douglas, are insuring for their registered valuation, without realising it often costs a lot more than that to demolish the remains of their existing home and build a new one.

Even homeowners who use their insurance company's online "Cordell" calculator are often under-insured, says Gary Caulfield, general manager of quantity surveyor Construction Cost Consultants.

The calculators assume that homes are of a group build standard unless you state otherwise.

Others simply accept the sum insured printed on their renewals. The trouble with this, says Douglas, is that in many cases the figure was incorrect in the first place.

One Takapuna house that Caulfield prepared an insurance valuation for had a default insurance valuation of $480,000, based on its 200sq m. The clifftop home, however, was high end and had many complexities to rebuild. The rebuild cost turned out to be a staggering $2 million. Had the owner accepted the default valuation and the home been beset by a catastrophe, he would have been left $1.5m out of pocket.

The Insurance and Savings Ombudsman is already hearing cases where owners failed to understand the concept of sum insured.

Being under-insured, however, doesn't mean you won't get a house if there is a total loss claim, says Tim Grafton, chief executive of the Insurance Council of New Zealand.

"Even if you are one of the (homeowners) who is under-insured by more than 10 per cent, it doesn't mean you can't get a house. But you will get a house that is 10 per cent less quality or smaller than you would have got if you insured for the correct amount," says Grafton.

Anyone concerned that they haven't insured for enough could add 10 per cent or 20 per cent to their sum insured. That doesn't mean you'll get 10 per cent or 20 per cent more than your house is worth. It means if the replacement cost is more than you anticipated you will be covered. This doesn't add much to the premium. "That extra $200,000 of cover will cost around about a cup of coffee a week," says Grafton.

Most claims are in the sub-$5,000 level, says Grafton. So most of the premium is calculated on that. Whether it's an $800,000 or $1 million home makes little difference to the premium. Grafton says he expects that the risk of under-insurance will diminish as sum insured calculators get more sophisticated.

An example is CoreLogic's Sum Sure calculator, launched in June. The calculator uses detailed data from the company's address level databases. The calculator knows automatically, the typography of most properties in New Zealand, their age, floor area, building materials, style of house and even the type of heating used in individual homes. It is also able to predict accurately consent costs and regional variations for rebuild costs. It then combines this data with insurance estimation technology from its United States sister company, which is widely used by insurers in that country.

Another small piece of good news for homeowners is that even if a home is under-insured, insurers will pay out the full value of claims that aren't total losses rather than pro rata them, which happens in some overseas markets. If your $400,000 home is insured for $300,000 and you make a $10,000 claim only three quarters of the claim will be paid. Here, the insurer would still pay the $10,000 claim.

Fix for hidden issues

A new insurance fixes hidden problems at the time of purchase. Insurance broker Mainprice King's "capped conveyancing insurance" allows owners to bring unconsented works up to the current NZ Building Code standard. It also covers:

• Non-compliance with registered covenants/encumbrances, including fraud
• Boundary disputes
• Seller misrepresentation
• Unknown rights over the property