15 home insurance surprises that could come back to bite you

How many square metres is your home? Jot down the number and phone an insurer to get a quote. Those were the good old days, weren’t they? Sadly, our streak of earthquakes put pay to it all.

In the wake of a natural disaster, demand-driven inflation takes hold. Insurance companies used to absorb these rising prices, but in recent years their pens have been scribbling and scrimping, tightening and tossing-out clauses.

There’s a plethora of risk-creep in all contracts, pushed to a level where we have a sum-insured time-bomb, a topper of indemnity disaster and a sprinkle of interior-design shock.

Of course, any insurance is better than no insurance. As affordability bites, we must accept our policies will force us to downgrade, downsize and compromise.

In short, we’ll require our own financial buffer or additional loans to mop up after insurers pay out.

15 insurance surprises you may not know about

1. Unlimited full replacement policies: These are now as rare as hens’ teeth. If you see “full replacement” on your home policy don’t get too excited. It generally means up to the sum-insured value. One of the only survivors is MAS, the non-profit Medical Assurance Society (anyone can use them) which pays out on square metres and soaks up any inflation.

2. An exception: When the loss isn’t caused by a natural disaster some policies fully replace your home if costs run higher than the sum insured. An example is a Vero Maxi Policy with “SumExtra”. You must keep records from a rebuild calculator (less than three years old) to prove you were fully insured and didn’t purposely underinsure. The premise is loss to a single property won’t cause widespread construction inflation. In a natural disaster there’s a capped 10% top-up.

3. Sum-insured time bomb: Inflation can catch you out. As an example with my own earthquake property, the first rebuild assessment grew and grew until the cost to the insurer doubled. Today, I’d be paying that difference or rebuilding far smaller. This financially life-changing risk now sits at the homeowner’s doorstep. Add to that the financial mess of those who don’t use a rebuild calculator or update annually.

4. Additions to the sum insured: Often alternative accommodation, landscaping and stress payments are still added on top of your sum insured, but fees (architects, engineers, surveyors) and demolition costs fall within the dollar value you named. Insurers’ in-house calculators should allow for this, but be wary. Architects cost 8% to 12% of a build value and demo costs skyrocket.

5. GST surprise: This is a 15% biggie. Many policies say the sum insured includes GST on building costs. My own policy is the opposite, GST exclusive, so an additional 15% will be added to the sum insured. It could catch you out if you’ve used the wrong rebuild calculator. There’s no industry consistency.

6. Indemnity disaster: The most basic insurance policies sold as “affordable” use the indemnity value of a home (depreciated value based on the expected life of materials). These policies need huge risk warnings. Customers have no chance of rebuilding or repairing with the proceeds. Often there’s no alternative accommodation payment. Insurers should show a financial comparison between rebuild and indemnity values, as customers can’t guess the magnitude of difference. It feels ripe for a mis-selling scandal. Indemnity is often described as “market value” or “as-is condition”, but the words are far too comforting compared to the reality of a depreciated payout.

7. Interior design shock: Most insurers no longer replace entire sets. That means you can end up with a group of mismatched kitchen cupboards, two different benchtops and one sofa that doesn’t match the other. Once you hit a doorway, the carpet replacement stops.

8. Ticking clock: Some insurers bolshily demand if you don’t settle in 12 months they could force a cash payment at indemnity value. I’m not convinced it’ll hold up if legally challenged, but insure with these companies with your eyes open.

9. Insurers’ rights to settle at any value: Some basic policies have clauses giving them the sole option to settle at indemnity, replacement or sum-insured values (whichever is lower).

10. Plant perils: Landscaping costs are very limited – often $1000 or $2000.

11. Heritage: Be on high alert if your property was built before the war ended. Indemnity value can be forced on you.

12. Betterment: When the insurance council says “build back better”, they don’t mean at their cost. You won’t find “betterment” in a policy. Only if local compliance laws have changed will you get something better, and your sum insured will need to be large enough to anticipate it. Occasionally there’s an upgrade payment such as Vero’s $3500 for “environmental improvements”. That might be solar, heat pumps or adding composting.

13. Mortgage clause: If your property has a mortgage, insurers pay the bank first. It poses an interesting dilemma with climate-change retreat. If a bank isn’t confident of the long-term insurability of a location, will we see a case where funds are not released for a rebuild?

14. Uninsured? If your home becomes part of an area the Government decides should not be rebuilt, you could still get paid out. Payments for uninsured people in the Christchurch red zone came in 2018, after a legal challenge. It will be interesting to see if that precedent is honoured for flood retreat.

15. EQC doesn’t cover your house in a flood: It only covers your land. Unlike an earthquake, the full amount of a home has to be paid by an insurer. We don’t cross-subsidise each other as much for floods. The Government may need a new scheme to spread flood risk, as high-risk locations become too expensive for homeowners to pay.

Janine Starks is the author of www.moneytips.nz and a financial commentator with expertise in banking, personal finance and funds management.