Janine Starks looks at the implications of a new insurance policy tweak that will put the pinch on homeowners forced to rebuild in the event of a new event. Your view?

By Janine Starks*

From my mail bag:

Our insurance policy with Vero came up for renewal in November. Luckily I had a good look at the paperwork and noticed we no longer have a normal full replacement policy based on the size of our home. They have capped the policy at $2000 per square metre. We have a hill home which will be rebuilt due to the earthquakes. Once it’s back in place, $2,000 a square metre wouldn’t cover us. How do we super-size our policy to cover a more expensive home? Are there any other changes I should be aware of?

Whenever an insurer changes the terms of their home policy it tends to send a few tremors up your chimney stack. The automatic assumption is that these will be in the insurer’s favour, with extra risk palmed off onto homeowners. Indeed that is correct in this case.

Your old uncapped replacement policy was less risky in a natural disaster. Vero have now introduced a ‘cap’ (maximum value) of $2,000 a square metre to replace your home if it is damaged by an earthquake, flood or tsunami. If your home burns down, they don’t seem to mind what it costs them. Alternatively, if your home is worth more, you can opt for what is termed a ‘sum assured’ policy.

With this option, a set figure is named with small increases added each year. Given your new home will be over the cap, you’ll need to consider this option.

When it comes to natural disasters, Vero have withdrawn the most wide spread and common type of policy from the Christchurch market, offering up the ‘cap’ or ‘set-sum’ instead. No one can guarantee if these changes might become more wide-spread across New Zealand as insurers digest the implications of natural disasters.

While IAG (the parent of State) confirmed to me they had not made any similar changes in Christchurch, the subsequent rattle in Wellington might have them pondering their own policy pages. Touch wood, but it is good to see that IAGs customers still have an uncapped policy available in the post-quake environment. In an attempt to maintain some balance, we do want our insurers to survive this calamity and we want them to continue to provide cost-effective cover.

Inflation protection gone

If they need to tweak and fiddle with their fine print to keep the premiums we pay affordable, then we need to acknowledge the benefits of them staying in the market. Big benefits which home owners will lose One of the major benefits Vero’s customers will lose is the protection they had from inflation during a rebuild. In a natural disaster with a large number claims, the price of labour and materials can be squeezed.

With an uncapped policy insurers absorb this risk. Now, the homeowner risks the rebuild costs spiraling through a cap, or exceeding the sum named on your policy. Vero is strongly signaling they won’t tolerate an uncapped liability again. The bull has clearly bolted in that particular Christchurch china cabinet and it makes me wonder if Vero will rein in their liability in other regions before the next Black Angus is let loose.

The other lost benefit is that policyholders never had to worry about valuing their home for replacement. Now, the only accurate way to get a replacement figure is to pay a Quantity Surveyor. A market valuation won’t cut the mustard as this is often well short of replacement cost. Bank managers in Christchurch are going to be flying about making sure their mortgage money isn’t put at risk by an insufficient cap. Is $2000 a metre enough? While some of you will be scoffing over your coffee at this generous $2,000 square meterage rate, think again. Sure, there are plenty of simple, low fuss homes which will be well served by this sort of policy, but there are also a vast number who will be out of pocket. As a reality check, how generous is the $2000 cap?

Professional costs can easily come to over 10% of the project value. If you strip out these and GST, the square meterage rate comes down to $1600. If you have high-spec features, or engineered foundations, how far is that going to go?

Other changes

Make sure you pay attention to the costs you now face (they only apply to Christchurch):

1. Premium costs are rising by 15% on homes and 5% on contents (that seems surprisingly fair, given the scale of the disaster).

2. A definition of ‘flood damage’ seems to include any pooling of water over multiple properties (not just caused by the likes of the sea, ponds or lakes). Presumably this captures liquefaction as a ‘flood’. It would be better if this was spelt out, given it’s top of mind.

3. Any contents claim coming from a ‘flood’ now has an excess of $10,000 (that will shock a few customers).

4. If things such as your swimming pool, spa, garden walls, drive, and paths are hit by a natural disaster, you have to pay the first $10,000. Same applies to any claim on your home for a flood (again, a pretty hefty excess).

5. In an earthquake, tsunami or flood, you now have to apply to have your policy reinstated. This allows the insurer to increase the cost of the premium (which they always could) and charge an additional premium mid-term.

6. In an earthquake, tsunami or flood, the most Vero will pay to you in one insurance period is the $2000 per metre cap or the set-sum you put on the policy (this has implications for those who rebuild quickly and another event strikes – potentially awful implications in fact!)

It seems it would pay not to rebuild too quickly. With change in the wind, home-owners need to act like sniffer dogs – noses to the page each time an insurance document arrives in the letterbox. In the case of Vero customers, each of you will have purchased a policy through a broker or adviser (the likes of AMP or ANZ), so there is more chance these intermediaries will point out changes and work with you to ensure you have the right protection in place. 

*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.