Full Replacement vs. Sum Insured: Navigating Your Home Insurance Choice

If you own a home in New Zealand, understanding the nuances of home insurance is essential. One key aspect to grasp is the difference between full replacement and sum insured coverage. This knowledge ensures your home is properly protected and helps you avoid unexpected financial costs in case you need to make a claim.

Let's dive into these two insurance models to help you make an informed decision for safeguarding your home.

Full Replacement Model: A One-Size-Fits-All Approach

Under the full replacement model, insurance companies promise to rebuild your house to its original standard, regardless of the cost. This approach calculates coverage based on the square meterage of the home, often overlooking the varying costs of different construction materials and features.

For example, imagine two homes, each 150 square meters. One is a modest, basic structure, while the other is a high-end, designer home with luxurious finishes. The cost to rebuild these homes would differ drastically. However, under the full replacement model, both are insured based on their size, not the actual cost to reconstruct them to their original standards.

The Christchurch earthquakes in 2010 served as a wake-up call for insurers. They realized they had underestimated their risk exposure by not accounting for the variability in rebuilding costs. Meeting all the claims became financially challenging, demonstrating that the one-size-fits-all model was unsustainable.

Sum Insured Model: Tailored Responsibility

Enter the sum insured model, where the power—and responsibility—shifts to you, the homeowner. Instead of a blanket promise to rebuild, insurers now ask you to specify the dollar amount you want to insure your property for. This gives insurance companies a clearer understanding of their total risk, as they know exactly how much they are liable for in the event of a disaster.

However, this shift also means that homeowners must take a proactive role in determining their coverage. The sum insured amount you choose should reflect the full cost to rebuild your home, including not just the construction expenses but also demolition costs, design fees, and compliance costs. A 150sqm home, for example, could range widely in rebuilding costs depending on whether it is a basic, quality, or designer build, the materials used, and the property's location.

It's recommended that homeowners seek professional advice, such as hiring a valuer, to ensure that the sum insured amount is accurate and sufficient. Alternatively, there are a range of tools out there that can assist you when determining this figure. Online calculators can provide an estimated typical rebuilding cost based on the information you input, including size of rooms, building materials etc.  This step can prevent the risk of under-insurance, where the coverage amount is too low to cover the actual rebuilding costs.

Making the Right Choice for Your Home

Understanding the difference between full replacement and sum insured models is vital for making informed decisions about your home insurance. With the sum insured model, homeowners must ensure their coverage is adequate to cover all potential rebuilding costs. Take the time to calculate these costs accurately and seek professional advice if needed.

If you have any concerns about your sum insured policy or need help determining the right coverage amount, contact your insurance broker or a professional advisor. By being proactive and informed, you can ensure your home, and your peace of mind are well protected.