Sum insured, some risk

What’s your liability if you estimate the rebuild value of a house for insurance purposes?

Using your knowledge as a builder to provide rebuild valuations for insurance purposes might seem like a straightforward favour for friends and family, or even an easy way to make some extra cash, but beware your liability in doing so!

For many years now, most houses have been insured for their replacement costs, based on their size in square metres. Insurers agreed to replace homes to the same size, regardless of how much it cost.

As a result of the Canterbury earthquakes, insurance companies are changing the way they insure homes. They found that the rate per square metre varies enormously and their models were incorrect. They are now going back to how it was done here 20 years ago, and the way it is done everywhere else in the world, by using a replacement sum insured.

This means homeowners need to work out the replacement cost of their own home or rental this year when their insurance is due. This total sum doesn’t only take into account the cost of building your home, but all costs associated with actually replacing it.

“As a result of the Canterbury earthquakes, insurance companies are changing the way the insure homes

Insurers have provided online ‘calculators’, which theoretically will calculate the cost to replace your home, and will be asking a lot of questions about the home’s components, such as:

• Construction standard (average, quality, prestige).
• Construction material (timber, steel frame, block, brick).
• Roof (metal, tiles, slate).
• Slope of land.
• Area of home.
• Garaging.
• Carports.
• Verandas.
• Heating/air conditioning (gas, electric radiators, heat pump, ducted, warm water).
• Ceiling height.
• Decks.
• Sheds.
• Pools.
• Fencing.
• Paving.
• Retaining.
• Driveways.

The cost of demolition, professional fees and the particular terms of your policy (such as whether it includes or excludes GST) also need to be considered.

The ‘sum insured’ that homeowners select will be the maximum that insurers will pay if the home needs to be replaced. If the home is insured for more than it costs to replace it, the insurer is only obliged to pay the cost to rebuild the home as it was.

“Check the terms of your liabilty insurance to see what’s covered and what’s not!

What does this mean for builders?

This is the tricky bit; customers, friends, family or neighbours may ask you to tell them, or help them work out, a replacement cost. Be very careful! If the sum insured you suggest is not enough, and there’s a total loss (for example a fire), then you could be held liable for the difference.

We have already started fielding enquiries from builders asking whether they can get insurance for giving insurance replacement cost valuations. The short answer is no. If you start doing this, you do so at your own risk! We highly recommend that you check the terms of your liability insurance to see what’s covered and what’s not in regard to professional advice.

About Bulitin New Zealand

Builtin New Zealand is a specialist in construction liability insurance, with policies tailored to meet the needs of builders & tradespeople. For more information visit www.builtin.co.nz/Insurance, email Ben Rickard at ben@builtin.co.nz or call him on (07) 579 6259 or 0275 212 014.