By: Annabel Sheppard
Published: 21/11/2013
For most people a house is one of the biggest and most important assets they will buy. It makes sense that protecting that asset should be just as important. Unfortunately, house insurance is changing and gone are the good old days of full replacement policies.

Previously when purchasing a property, you would simply supply your insurance company with the floor area of your house and they would insure your house on a full replacement basis. If it was damaged or destroyed they would repair your house or rebuild a new house with the same specifications as the original, without an upper cost limit.


In the wake of the Canterbury earthquakes the majority of insurance companies are changing to a sum insured policy. What this means for you is that there will now be a maximum amount the insurance company will pay to reinstate your house if it is damaged or destroyed, called the "sum insured".

The most important thing to note is that if it costs more than the sum insured to rebuild your house, you will have to make up the difference. Likewise, if the sum insured is too high you could be paying too much for your policy, and your insurance company will not refund any premium to you. It is important to get the sum insured amount correct and the responsibility now lies with you as the insured to provide that amount to your insurance company.
 
So how do you go about calculating the sum insured of your house?

Do not use the market value or government valuation for your house. Both these amounts include the value of the land as well as the dwelling and do not take into account incidental costs of a rebuild such as professional fees, obtaining consents and demolition and removal costs.

There are two ways you can calculate the sum insured for your house. Which one you use will determine how accurate your sum insured amount will be and may depend on the type of house you own or are looking to buy.

Your first option is to use sum insured calculators, available on most insurers' websites. These calculators estimate the cost to rebuild an average house. If you opt to use the calculator take careful note of the questions asked when filling in the calculator. If your house is architecturally designed, requires special foundations (e.g. if it is on TC3 land) or has expensive upgrades such as marble kitchen benches then a calculator estimate might not cover these.

Keep in mind these are estimates and not exact workings. It might be a good idea to use a few different calculators, to make sure the figures are consistent. It is safer to over-estimate your sum insured than under-estimate it, and the difference in premium is often surprisingly small.

Your second, and recommended, option is to engage the services of a professional quantity surveyor to calculate the cost of replacing your house. This option is more accurate than using the calculators and is best if your house is a high-spec property or is not a standard design. This is the more expensive option, but when dealing with something as important as your house, it makes sense to take that extra step.

Make sure you disclose all relevant information to your insurance provider. If you are planning substantial renovations let your insurer know. If you do not this may affect your cover when you make a claim on your policy.

Finally, keep in mind that building costs change regularly, so the sum insured amount should be reviewed annually to reflect this. Following major events such as the Christchurch earthquakes demand for building supplies increases, pushing costs up rapidly.

Factors such as this should be tailored into the sum insured amount if possible. Remember, it is your responsibility to set the sum insured figure, so make sure you take the appropriate steps to ensure that you are adequately covered. 
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