A leading firm in the construction industry is warning that changes to home insurance policies are leaving up to 93% of home owners underinsured to the tune of 25% to 50%.
Quantity surveyors Construction Cost Consultants has produced 25,000 insurance reports based on quantity surveys of residential properties, and is involved in $4.5 billion worth of rebuild works in Christchurch.
They say in the event that home owners need to fully rebuild their houses, most will find themselves at least 25% short of the rebuild cost, having accepted the default sum provided by banks and insurers.
The figure can be as high as 50% when more complex features such as retaining walls are present.
Based on that 25% estimate, the number of private dwellings (1.765 million) and the median national house price ($407,525), the company estimates that $167 billion worth of residential property, at a minimum, is currently not insured for rebuild (the total value of housing is more than $717 billion).
Construction Cost Consultants Residential managing director Gary Caulfield says the shortfall is not the fault of financial services providers or consumers, but results from a widespread lack of awareness of the true cost of rebuilding a home after a fire or other disaster.
“Insurers are very clear in policy renewal documents that their customers should not rely on the default sum provided, but should seek a more comprehensive assessment on which to base their sum insured,” Mr Caulfield says.
“Banks and insurers know that it’s in their own interests to ensure that customers have comprehensive cover, so providers themselves aren’t exposed if the worst happens.
“However, based on the data we have received from partners in the financial services sector, 93% of home owners are not heeding this advice, and insuring for the default sum provided by their insurer.
“Of the remaining 7%, most are using the Cordell Calculator, and a minority are seeking assessments from property valuers or quantity surveyors.”
Mr Caulfield likens the risk consumers are facing to the finance sector collapse that sucked up more than $1 billion in investor debentures during the global financial crisis.
Similar catastrophe simmering?
“People thought they were doing the right thing by diversifying their investments, but they were the victims of a lack of regulation and oversight that caused vast loss of personal wealth.
“We are very concerned that a similar catastrophe is simmering here. Most people have a high proportion of their net worth tied up in their homes, and they are doing the right thing by insuring, and trusting the number provided.
“What they don’t know, and what no one is telling them, is that the default sum is essentially a random number.
“To get an accurate figure for most homes, a two-hour assessment by a construction cost expert is required. Banks and insurers are not in a position to provide or require this, and an online calculator is a poor substitute for a comprehensive site assessment.
“In most cases the calculator will give a higher sum insured than the default sum, but it will still be insufficient to fund a full rebuild.”
Consumers should also be aware of the different types of professional property assessments available, to be sure they obtain the necessary information for insurance purposes.
A property valuer will assess the property in its entirety, and subtract the land value from the overall value to give the value — and rebuild cost — of improvements.
As part of their training, valuers spend about four months learning how to assess buildings and crunch the numbers involved, and many rely on calculators. They are not required to provide warranties or guarantees of their reports.
Quantity surveyors specialise in construction cost assessment, in which they receive a minimum of four years’ training.
Many quantity surveyors will provide warranties and guarantees of their insurance reports for a set period, and have professional indemnity insurance. Home owners are advised to request evidence of these measures before proceeding with an assessment for insurance.