Close to home – insurance on the domestic front

  • May 5, 2014
  • David Middleton

Just as businesses should have adequate insurance to underpin their risk management strategies it is important for a family to be able to rely on insurance should sudden disaster strike and threaten its financial viability.

A family’s greatest physical asset is its home (another vital asset is the earning-power of the parents and this should be adequately insured as well, but that is another story).

Home insurance has been a worry for many homeowners recently as they grapple with the “new” notion that they have to nominate a value as the maximum amount the company will pay out in the event of a claim.

In fact this is not new at all and used to be the case, however, a couple of decades ago smart insurance marketers came up with the idea that homeowners need not nominate a sum insured and policies would be worded to cover full replacement of a home whatever the cost. Now the underwriting departments of insurance companies are insisting on turning the clock back, having been shocked by the actual cost of rebuilding homes following the Canterbury earthquakes.

Companies are trying to be helpful by suggesting a sum insured for each customer, based on the floor area of their home, often the only piece of underwriting information on the file of the company. But they themselves recognise this is a blunt instrument and may understate the sum insured (after all, this is the reason for their own under-estimation problem). So they point the homeowner to a website that offers a calculator for a more precise calculation. You will be asked for more detail, such as the number of storeys, quality of the building materials, age of the house, number of bathrooms, whether there is central heating, how much the section slopes, and so on.

I recently got my homeowner insurance renewal notice. It was accompanied by a letter explaining that open-ended policies were no longer being offered and suggested a sum insured based on the floor area of my home. I went to the internet calculator that my insurer recommended and completed all the questions. The calculator suggested I insure for double what the insurance company was suggesting.

The premium had already made my eyes water, so it was with some trepidation that I rang my insurer and asked what twice the sum insured would cost. It amounted to 15% more. I then asked about increasing my excess. The company was now offering a variant, a “disappearing” excess of $1,000. No damage costing less than $1,000 could be claimed for but damage costing over $1,000 would be reimbursed in full. By accepting this, my premium increase fell to 7.5% more than what was on the renewal notice, and I was getting twice the amount of cover.

So it isn’t hard to assess a more realistic sum insured and it is not hugely expensive to increase it beyond what your insurance company suggests. It is the homeowner’s responsibility to insure for enough but the extra premium involved means they can be cautious and round up the internet calculator’s sum by a few tens of thousands for safety without breaking the bank.