Insurance tips: Options for insuring your castle

By John Grant If you look around at the types of policies for insuring houses then you have important alternatives to consider. The first choice is whether to insure for a fixed dollar amount or have a policy that will rebuild based on a declared size of the property. The most common is a policy based on size and if choosing this then it's very important to get the description and size correct from the start. One way to do this is to use the mortgage valuation of the property. That valuation will show the construction and size of the property. If that is not available, any valuer will be can supply an insurance valuation. It is not wise to use information from your local council rating data. It could be many years since the property was originally sighted by a valuer and it is possible additions have been added that have not been included in the current information. An added issue according to Glenda Whitehead from QV is the fact that valuations for rating purposes quite often rounded the size to the nearest 10 sq metres. If opting for the policy that provides cover based on the size of the property then once correctly set, no further adjustments will be needed until the property is extended or altered in physical size. An insurer will normally want to know the size of the property, the number of levels, size of decks, and size of outbuildings.  As a final check a photograph attached to the application is always helpful. The other alternative for insuring a property is to set a sum insured for a fixed dollar amount. This is where a value to rebuild the property is specified. It is critical that the calculations for replacement cost are done correctly. An understatement could leave a serious shortfall if the property needs to be rebuilt. This type of policy needs to be annually reviewed to make sure it keeps pace with current rebuilding costs. In many cases the option to buy a specific sum insured is not only more limiting in that it defines a monetary limit but also can cost more than a policy based on the size. An example can be found in our comparison data by looking here. If you insure for a dollar amount then you will need to decide if you will insure for "replacement value" or "market value". A property with a $450,000 market price may include land that makes up $200,000 of this. Don't insure the land - its not going anywhere. The buildings alone therefore have a current market value of $250,000, however it could cost $350,000 to rebuild the same size property. Your option is to either insure for market value ($250,000) or replacement value ($350,000). Included with any house insurance is government earthquake cover. This compulsory coverage is capped at $100,000 however. Insurers will offer additional cover to make up the difference between replacement and the government earthquake cap, and is usually automatically provided. But, always check that it is. So which option is best? A policy based on the size of the building provides is often the better choice because it not only protects you for replacement but is usually the lower cost option. If the amount of premium is an issue then consider a voluntary excess and also limiting the cover to defined perils (limited to specified events like fire, explosion, storm, flood). The combination of higher excess and limited cover will have a significant impact on lowering the annual premium cost. A note on replacement cover however; if it is an older property (usually over 50 years old plus) then such cover may not be available unless the house has been renovated with full rewiring and the switchboard upgraded. Check with your insurer or broker/adviser to see if your property qualifies.