Replacement or fixed value insurance?

The Dom Post editorial noted:

Home insurance used to mean “total replacement”. If your house got blown over, you’d get a new one, as close as possible to the original, no matter the cost.

In the wake of the Christchurch earthquakes, with their mammoth reconstruction bill, insurers have moved to put a cap on how much they will pay out homeowners. That’s defensible – they, and their international reinsurers, have been badly burned by the quakes, and they need a better idea of their liabilities.

But it’s how they’ve handled the change that’s the problem. The onus has fallen on homeowners to determine exactly how much cover they need. Clearly that’s a specialist task that most people can’t manage.

Yet, if they get it wrong, they could be in real trouble, caught hundreds of thousands of dollars short of rebuilding the house they once owned.

To be fair, insurance companies do send out a rough suggestion for a figure. But what’s most alarming is that these “default sums” are consistently too low, at least according to valuers and quantity surveyors.

Putting aside what level the fixed value is, I think that may be the way of the future.

We’ve seen with Christchurch that total replacement is a recipe for years of delays, arguments and dissatisfaction.

The benefit of fixed value is if your place gets totalled, then bang you just get a cheque for the value insured, and all sorted in hopefully a few weeks.

The insurance companies needed to put more work into this – less television advertising and more accurate calculations to help people set their cap right. Most people aren’t inclined to pay for a professional valuation, but they will still be devastated if they can only rebuild themselves half a house.

Some industry figures suggest that people, especially older people in large houses, might deliberately under-insure themselves, and accept a smaller house if disaster strikes.

Or a house in a different suburb.