Extreme Shortfall in Default Sum for House Insurance
Media Release June 2014
NEW REPORT ILLUSTRATES EXTREME SHORTFALL IN DEFAULT SUM FOR HOUSE INSURANCE
Much like a house begging for renovation, the default sum being offered to homeowners under house insurance guidelines introduced on 1 July 2013 is in need of an extreme makeover. Late last year, Construction Cost Consultants warned that 93% of homeowners were opting for the default sum insured provided by their bank or insurer, leaving them underinsured for the full cost of rebuild to the tune of 25% to 50%.
Based on a 25% national underinsurance 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’s estimate at the time was 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).
Now, Construction Cost Consultants, which employs registered quantity surveyors who have produced over 27,000 insurance reports based on elemental surveys of residential properties, has compiled hard regional data into a report that illustrates the gap between the default sum from providers and the actual cost of rebuild determined by expert quantity surveyors.
The report shows that for each $100,000 band of rebuild value between $300,000 and $2 million, the average construction cost for each band is not relative to the default sum provided by each insurer.
Meanwhile, banks and insurers are addressing the evident shortfall between what their customers are insured for and the true cost of full rebuild if the worst happened. The calculations made by providers to reach a default sum for each customer is simple, but there is no consistency of metrics, definition or measurement. As a result, square-metre rates used to calculate default sums range from $1,850 to $2,300, depending on the insurer.
Gary Caulfield, the General Manager of Construction Cost Consultants, says that although insurers clearly state in policy renewal documents that the recipient should not rely on the default sum provided but seek a more comprehensive assessment on which to base their sum insured, at present between 75% and 80% of people still ‘tick the box’. (Still, this is an improvement on the 93% figure observed six months ago.)
“This leaves all parties – the homeowner, the home loan lender and the insurer – exposed, and the insurers are now telling us that they will be recalculating their square-metre rate to produce a higher default sum for customers from the first anniversary of the new guidelines on 1 July 2014.
“Banks and insurers know that it’s in their own interests to ensure that customers have comprehensive cover, and that the increase in premiums that will result from a higher default sum – unless the customer opts to lower the sum insured, which they are free to do – will be balanced by a more accurate degree of coverage in the event of loss. The default sum is essentially a random number.”
Based on recent data reported by media, between 75% and 80% of homeowners accept the default sum provided by their insurer. Most of the remainder use an online calculator to work out a new sum insured, and a minority seek assessments from quantity surveyors or property valuers.
Different types of professional property assessments are available. Quantity surveyors specialize in construction cost assessment, in which they receive a minimum of four years’ training. Many quantity surveyors will provide insurance backed warranties and guarantees of their insurance reports for a set period, and have professional indemnity insurance. Homeowners are advised to request evidence of these measures before proceeding with an assessment for insurance purposes.
Valuers are not specially trained in construction measurement, estimating and cost. Many relay on construction cost publications such as Rawlinson’s to ascertain values. They are not required to provide warranties or guarantees of their reports.
Construction Cost Consultants’ report is based on a review of over 2,000 completed rebuild valuations in the Auckland region in 2013 and 2014.
Results have been split into bands of rebuild value, ie construction cost.
The construction cost
• Professional fees;
• Building consents;
• Construction costs;
o Building structure;
o Building envelope;
o Internal finishes;
o Driveways, paths and patios;
o Decks, balconies and verandas;
o Swimming pools, spas and any other recreational features;
o Retaining walls;
o In-ground services and drainage.
• Builder’s profit.
The GFA (gross floor area) is the useable floor area of the property, including garages if attached to the main residence. This is measured to the outside edge of the wall element. The GFA does not include outbuildings, sheds, decks, patios or detached garages.
The results confirm
• The smaller the property, the larger the $/m2 rate;
• The larger the property, the smaller the $/m2 rate;
• The average construction cost for each band is not relative to the default sum provided by each insurer;
• The larger the value of rebuild, the larger the $/m2 rate.
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 (Royal Institute of Quantity Surveyors);
• Professional indemnity insurance;
• Track record / experience in the field;
• Format of insurance report (ie is it approved by the Insurance Council of New Zealand);
• 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 detailed 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. Premium costs can be as low as
$40 for an additional $100,000 in cover (per AA
• 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 15 working 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.
Construction Cost Consultants
Construction Cost Consultants is a privately-owned firm of professional quantity surveyors and NZIQS members working in the residential and commercial arenas. Its range of high-quality construction management services to the national property market includes:
• Quantity surveying and construction cost consultancy
• Accurate and guaranteed insurance rebuild valuation reporting to residential and commercial property owners nationwide
• Partnering and procurement
• Construction, commercial and programme management and project monitoring
• Contract administration and claims/contract assistance
• Strategy and advice
• Project management training and seminars
• Client representation
• Dispute resolution and litigation support services
• Disaster recovery
Employing the best consultants from New Zealand, the United Kingdom and beyond, we apply extensive commercial acumen based on a history of delivering programmes on schedule and within budget. Construction Cost Consultants meets client needs from conceptual design stage through to project delivery, and offers a full spectrum of services to building owners, construction companies, subcontractors and suppliers, funding bodies and insurance companies.
Some of our consultants are currently engaged by a PMO in Christchurch, and are leading the providing commercial management, quantity surveying and contract and procurement service to that organization, and associated advice to insurers as the rebuild progresses. To date, Construction Cost Consultants has completed more than 20,000 rebuild valuations in Christchurch. The value of works to be carried out with the involvement of our consultants is currently $4.5 billion.
In association with our Christchurch work, we have established a process with proven and measurable results that is applicable to any disaster recovery programme globally.
In the national residential market, we have undertaken more than 27,000 quantity surveys for rebuild valuations on private homes around the country. All insurance rebuild valuation reports for residential and commercial properties are supported by an insurance backed warranty and are guaranteed by Construction Cost Consultants for two years from the date of issue.
Our services are available throughout New Zealand and in Australia. We can also work on other international assignments as required, on a short- or long-term basis.