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10 December 2018

Getting over underinsurance

You’ve invested a lot of time, energy and money to get the possessions you value. Understanding the value of insurance, and just how vulnerable New Zealand is to natural disasters, you’ve sensibly gone to the effort of insuring them. Claims time is not the right time to find out about the limitation of your coverage. 

You need to make sure you have got just the right amount of home, motor vehicle or contents insurance cover: too much and you’re paying more than you need, too little and you may not get a pay out at claims time.

What is 'total sum insured'?

New Zealand insured require homes to be insured up to a specified amount - total sum insured - so they know the maximum they may need to pay to rebuild your home in event of a total loss. The onus is on homeowners to estimate the cost of replacing their homes correctly and to ensure enough cover is in place to repair or to rebuild their homes to the same size and quality. Ensuring rebuild costs are kept up to date is vital.

Underestimating the cost to replace assets could leave people underinsured and open to another disaster.

What is underinsurance?

Underinsurance means not being insured for the true value of your asset. Some examples are:

  • Your home is insured for $700,000 and burns down but costs $800,000 to rebuild
  • Your contents are insured for $40,000. However, after a burglary it costs $55,000 to replace your household goods and items
  • Your vehicle is insured for $12,000. Unfortunately, it is written off and costs $16,000 to replace.

In every case, you’re caught short. When just coping with the loss itself can be devastating enough, underinsurance leads to more stress you do not need. Would you be able to find the extra money to complete your home or afford a replacement without insurance? Settling for an item which was not quite as good as your that was lost or destroyed just doesn’t’ seem fair.

Why are people underinsuring?

Underinsurance can happen for a number of different reasons, for example seeing insurance as a box-ticking exercise or as something that could disrupt a current policy and lead to an increase in annual premiums.

Underinsuring your home to help keep the premiums down can be false economy, especially when the cost for the right coverage may surprise you. The premium difference between being underinsured insured and being properly insured does not cost as much as many people fear.

Some people rely on market valuations for setting their sum insured, but these should not be used because they are not based on rebuild costs and will also include the value of the land.

Additional cover may also be needed for things like retaining walls, pools, special features and fences as well as demolition and removal costs.

And of course, things change over time. Industry professionals recommend home insurance is reviewed thoroughly every three to five years.

What can you do to ensure you have sufficient insurance protection?

  • Check your home sum insured is enough to cover repair or rebuild costs, taking into consideration features like retaining walls, tennis courts, swimming/spa pools, bridges, power generators, driveways, wharves and jetties etc.
  • Arrange for a rebuild valuation by recommended quantity surveyors or valuer
  • Work out the estimated cost to rebuild your home using the Cordell sum insured calculator
  • Make sure you remember to include any additions, alterations or renovations made to the home since last annual renewal, as these will increase rebuilding costs
  • Check your contents sum insured will cover all your household goods and valuables should you suffer a total loss
  • Check your contents policy to see if there are items which need to be specified above a certain dollar value. Common items are:
      • jewellery and watches
      • camera equipment
      • tablets and phones
      • bicycles
      • kayaks, surfboards, windsurfers, dinghies, surf skis
      • stamp or coin collections
  • Make sure your car cover (sum insured) reflects the current market value of your car.

Tell us about any changes to your cover that need to be made.

At Crombie Lockwood we’re here to help you understand exactly how sum insured insurance works. We’ll guide you through the process of setting the total sum insured and compare insurance quotes for you.