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Almost Universal Home Underinsurance Under Guidelines

Media Release March 2014

Construction Assessment Firm Signals Almost Universal Underinsurance Under New Home Insurance Guidelines

A leading firm in the construction industry has warned that changes to home insurance policies are leaving up to 93% of homeowners underinsured to the tune of 25% to 50%.

Construction Cost Consultants, a group of quantity surveyors that 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, says that in the event that they need to fully rebuild their houses, most homeowners 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), [New Zealand population data October 2013 (Statistics New Zealand); REINZ newsletter November 2013.] the company estimates that $167 billion worth of residential property, at minimum, is currently not insured for rebuild. (The total value of housing is more than $717 billion).

Gary Caulfield, managing director of Construction Cost Consultants Residential, 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. 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 homeowners are not heeding this advice 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 GFC. “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 on 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 specialize 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, and homeowners are advised to request evidence of these measures before proceeding with an assessment for insurance.

Fact Sheet

Before engaging a quantity surveyor, a homeowner should request evidence of:
• Professional qualifications – NZIQS (New Zealand Institute of Quantity Surveyors) membership, QSI (Quantity Surveyors Institute), RICS
• Professional indemnity insurance;
• Track record / experience in the field;
• Format of insurance report (ie is it approved by ICNZ);
• Warranty and guarantee of insurance report for a fixed term (Construction Cost Consultants guarantees reports for two years from date of issue);
• Content of insurance report and what it will provide, ie detail breakdown of costs.

Construction Cost Consultants’ most frequently asked questions:

Will my insurance premium go up? This depends on whether the insurance report finds that the current level of cover needs to increase to reflect the cost of rebuild. On average, every additional $50,000 worth of cover costs approximately $75.
How often am I required to seek an assessment for insurance? Insurance policies must be renewed annually. However, insurance reports by Construction Cost Consultants cover a two-year period.
How long does it take to get a report? The time from request for survey to issue of report is approximately 10 days.
Will my insurance report / increased insurance premium affect my rates? No. The information is solely for the person who orders the report, and is not provided to any third party by Construction Cost Consultants.
Does the survey include decks, outbuildings, swimming pools and so on? Yes. Everything except land is assessed for construction cost and included in the report.


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