Insurance pitfalls for unwary

Insurers were were shocked at the cost of the Christchurch earthquake. Photo / Brett Phibbs

Weekend Herald consumer finance writer Diana Clement explains changes to home insurance policies and how they could affect you

What is happening? Insurance companies are changing home insurance policies from open-ended "replacement" policies to "sum insured" policies. In future they will only pay up to the sum insured that you choose, not for open-ended replacement of your home if it is destroyed.

Why is this happening? Insurers weren't as prepared for "the big one" that hit Christchurch as they should have been. The Australian-based actuaries who consider risk and price policies were profoundly shocked by the cost of the earthquakes and have reacted conservatively, says Dr Michael Naylor, senior lecturer in finance at Massey University. Equally, insurance companies need to spread their risk and they do it by buying insurance policies with reinsurers such as Swiss Re and Zurich. These reinsurers are pushing for the change.

When will it happen? Some insurance companies such as AA have already moved to sum insured policies. Others are changing at renewal time this year. Insurers can make changes to the wording of a policy at renewal time because each year's insurance is a new contract.

What do you need to do? The first thing you need to do is to read all the letters and other paperwork that comes from your insurer this year. It should explain the changes in plain English. If your policy has been changed to a "sum insured" policy you will need to work out a replacement value for your home.

How do I do that? It's not going to be easy. If you're really concerned you could get an insurance valuation on your home from a property valuation company. A replacement valuation covers "improvements", which includes the house itself, driveways, fences and other man-made structures such as tennis courts and sleep-outs.

Can I do this online? The insurers are expected to offer a web-based service that helps you calculate the correct sum insured. An example of this can be found at tinyurl.com/cordellcalculator. It asks all sorts of questions such as the type of cladding, the height of ceilings, roof type, driveway measurements, and even whether you have a built-in vacuum cleaner system. The calculator spits out an estimate of the amount required to rebuild your home at the end.

What if I get it wrong? Sadly you will lose out. If, for example, you insure your house for $250,000 and it really costs $350,000 to replace, the insurance company will only pay $250,000 towards the rebuild.

What if I want the money instead? Insurance policies have clauses that say you will be paid "indemnity", that's replacement value less depreciation, if you don't agree to the home being reinstated. So you'll get less if you want the cash.

Will it cost me more? People who have "premium" homes insured through standard policies not premier ones or those who underestimated the size of their house in the past will mostly pay more. Naylor believes that some of the smaller insurers such as Lumley and Tower may continue to offer open-ended replacement policies, and competition might eventually lead IAG and Suncorp Insurance, which have more than 80 per cent of the market between them and own most of our insurers, to re-enter the market. "There is scope for the smaller companies to rapidly increase market share if they advertise superior products," says Naylor. Open-ended policies will cost more than sum insured ones, however.

Are there other changes? Herald readers have reported that their excesses have risen. One found in February that her glass excess had risen from $250 to $400, but more importantly a new natural disaster excess of $5000 had been imposed. Insurance broking group Crombie Lockwood has seen a trend towards clients taking voluntary excesses to decrease premiums. Home insurance claims are few and far between so a larger excess makes greater sense.

What if I need help? Insurance brokers are independent and can help find the right policy for you. They can also advise at claim time. As Daryl Hughes, communications manager at broker Crombie Lockwood Group says: "There are innumerable opportunities for miscalculation or misunderstanding" and it makes sense to use an expert (broker) who can navigate the pitfalls.

• For complaints about insurance claims contact the Insurance & Savings Ombudsman.