A shift to “sum insured” rather than current full replacement or reinstatement means property owners need to be proactive to ensure their buildings and improvements are adequately covered. This may even mean providing insurance certificates (or similar certification) to identify clearly the sum insured.
Historically, insurance certificates have been used primarily for commercial buildings. But more recently there has been a trend towards providing insurance reinstatement estimates on high value homes as well, typically with improvements over ~$1,000,000 in value. This work is typically prepared by a professional Quantity Surveyor or Registered Valuer.
An insurance certificate can provide a number of insurance estimates:
- Reinstatement – which is defined as the cost of replacing or reinstating the asset with its equivalent in new condition, including, where appropriate, the use of current equivalent technology, material and services. In addition, an estimate of an inflationary provision is given, being the expected inflationary growth in those costs for the insurance period.
- Indemnity Value – this can be defined typically either as the depreciated value of the asset, or alternatively the estimated market value of the second hand asset (excluding land). The figures may vary and which is adopted could depend on the wording of the insurance policy.
A wider general interpretation of indemnity value would be the estimated market value of the asset. In other words, in the event of a total loss, the insured would be covered to the market value of the improvements. These figures require a Valuer’s input to determine as it is assessed using market data and methods. Consultation on the appropriate method of calculating indemnity value is needed.
The decision then needs to be made by the insured on whether to insure their asset on a full reinstatement basis, or an indemnity value (market value) basis. This then becomes the “sum insured”.
Changes to insurance policies have important ramifications for home owners
Owners will need to accurately value the rebuild cost of their asset to provide sufficient cover in the event of a total loss. The sum insured will be fixed for a precise amount. This gives some certainty to the insured but it is imperative there is adequate cover. This is best done by a Quantity Surveyor with appropriate experience, especially on larger, high quality property or original character and period homes.
The owner could alternatively elect to only insure based on indemnity (or market) value. This may reduce insurance premiums but could leave a shortfall to the owner if complete reinstatement is needed. This type of cover could be used perhaps where an asset is old and rundown and may not be replaced in the event of a total loss, particularly where the underlying land value could be high and the site is more suited for redevelopment.
The big danger to home owners is making sure their fixed sum of cover is sufficient to adequately replace the asset. This is where a Quantity Surveyor or Registered Valuer’s input should be used. It is also very important this fixed sum is updated regularly – typically every two years – to ensure the asset remains adequately covered.
To find out more about how we can assist with your insurance needs, see our Valuers’ Insurance Valuations or Quantity Surveyors’ Rebuild Estimate for Insurance services.
See also Diana Clement’s NZ Herald article: Homeowners may be in for an insurance shock
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