Insurance
Janine Starks reads the fine-print on one couple's residential insurance claim and finds reason to stay calm, front-up and carry on. Tell us your story
26th May 11, 3:33pm
by
By Janine Starks* (email)
From my mail bag: Dear Janine, I'm wracked with worry about our situation after the earthquake. I’ve discovered we are under insured, as only 70% of our actual floor area is on the policy and the size of the deck isn’t declared. It's the feeling of foreboding that's doing my head in. We think we are over the $100,000 cap from EQC, so once State Insurance take over, they will discover the horrible truth. We had a larger floor area insured, but last year I found our original insurance documents and a Valuation New Zealand report which both showed a smaller square meterage. We haven’t added any extensions. I thought I’d been wasting money insuring a larger house and decreased the cover. I'm now thinking dark thoughts, like if it's a rebuild or a repair we'll have to come up with 30%of the cost. Could we rebuild the cheaper parts of the house ourselves? Would we have to rebuild a smaller house? My brain is mush!
Have you ever heard the line from Dr Suess “he puzzled and puzzled till his puzzler was sore”? Well in situations like this your puzzler could make you ill and send your blood pressure through
the roof. Under-insurance can cause a lot of stress and it must have been a terrible heart- thumping moment when you discovered it.
The best antidote is to find out the truth and know what the consequences are. It gives certainty and takes away the guessing. Don’t blame yourself; you had two documents in front of you which led you to believe your floor value was overstated and that may count in your favour. No one wants to waste money by paying an insurance premium greater than required. When it comes to errors, insurers look to see if it was genuine and you have good evidence that your mistake was unintended.
Rather than waiting for the knock on the door from State Insurance, you need to swing into action. Phone State and give them the new floor area for the house immediately. That way if we have another earthquake tomorrow, you are covered.
I’ve called State to check their position and as you’re an existing customer, there is no stand-down period. They will put the extra cover in place straight away. Make that call and you can sleep at night without the fear of further damage. I assume you have employed a surveyor to get the correct house size?
A ray of hope
State Insurance is very keen to speak with you and I’m able to put you directly in touch with one of their General Managers in order to determine what they can do to help.
It’s nice to hear an insurer say this. In my discussions with them they have emphasised over and over that customers need to come forward if they are worried about mistakes with their floor area.
In some circumstances, after looking at all the facts, they will agree to amend a policy retrospectively. An additional premium would be charged, if you should have been paying for a larger house. I need to emphasise that this isn’t a common outcome and it’s only a possibility. You’ll need to discuss with them exactly how the error happened and let them make a ruling on it.
A grinchy frown
At the opposite end of the spectrum, we need to cover off a slightly scary but important legal point. Without wanting to make insurers look like the Christmas Grinch, they do have strict rules when it comes to declaring your floor area.
Insurance forms ask you to declare the exact size of your house. There is no option to guess a number willy nilly or choose how much of it you’d like to insure. Insurers don’t tolerate misrepresentation and are perfectly entitled to void your policy (understating the size of your home is still a misrepresentation as you received cheaper premiums).
The consequences of getting it wrong are that you have to negotiate with your insurer to reach a fair settlement, outside the contract.
While they have the legal power in these cases, they do realise that people make genuine mistakes. If they come up with a settlement which is unfair, you can get it reviewed internally by the insurer or you can take it to the ombudsman.
There is a whole spectrum of outcomes which could occur.
The insurer could agree to settle the full claim, or they might pro-rata the costs of a repair / rebuild of the home, with you meeting some of these costs. They could also look at settling on an indemnity basis, where they cover the written-down value of the house, instead of replacement value. The result comes down to an individual negotiation, where they weigh up all the facts and look at what is fair. It would certainly be wise to get your own lawyer involved before agreeing.
Look on the bright side. If it’s a rebuild and you end up with a smaller home, or create the same size with cheaper materials, you will still end up with a post-quake new house. Common sense tells me these homes could hold their value better and sell quicker than pre-quake homes.
Don’t mangle the measurements
We as homeowners are responsible for checking the plans held at the council to confirm the floor area of our homes, or we should pay for a survey if there is any doubt. If your bank or broker says they’ll find the size for you, double check it and keep evidence of it in your files. Very few people will ever have their policy voided, but it would be a serious ‘boo hoo’ moment if it happened.
State tells me that when a customer decreases their floor size, they question them carefully to ensure they are making a correct declaration. In this instance, you had documents supporting the decrease, so your actions would have appeared acceptable.
When it comes to your deck, State doesn’t require that this is included in the floor size, but they have a question on their
form which asks if you have any other feature on your home which could be worth over $5,000. This is where the deck should have been declared.
Tips to avoid under-insurance:
- Check the floor area on your policy against council plans, or original drawings. It’s the footprint of the house that needs to be measured (the outside walls) not the measurement inside each room (this is slightly smaller). Remember rooms in the attic or mezzanine floors
- Ensure you declare all new extensions to your home
- Make sure you add each level of the house together
- Ask your insurer how you should declare decks, garages and swimming pools
- Reassess your contents policy regularly
*Janine Starks is Co-Managing Director of Liontamer Investments. Opinions in this column represent her personal views and are not made on behalf of Liontamer. These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.
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Email questions to starkadvice@gmail.com, subject line: Financial Agony Aunt.
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