Diana Clement: It pays to ensure you know your cover well

It's inevitable in Christchurch that there will be some very unhappy policy-holders. Photo / Brett Phibbs

House insurance is one of those things that we just have to have. Only a small number of policy-holders make major claims most years.

Thanks to the Christchurch earthquakes, tens of thousands of policy-holders are in this position in 2011 and many have big headaches looming.

When disaster strikes it's not just a matter of the insurance company turning up with a magic wand and giving you your brand new dream home. As many policy-holders will learn, they'll need to understand the fine print of their insurance policies, follow works on site and be willing to argue their corner.

In Christchurch most home owners whose property is severely damaged will deal with both their insurer and the Earthquake Commission (EQC), which pays up to the first $100,000 plus GST of the house claim.

Once an assessment of the extent and value of the damage is agreed with the owner, the EQC will do one of the following:

* For most house claims under $10,000 and all contents claims up to EQC's limit of $20,000, a cheque will be sent to the policy-holder.

* Building claims in the $10,000 to $100,000 range are paid to the EQC's project manager, Fletcher Construction, when repairs are done.

* Where the claim exceeds $100,000, the settlement will be paid to the bank or other lender if you have a mortgage and the insurance company then takes over.

What happens to the money if it's paid to your lender will depend on individual circumstances, an EQC spokesperson said. "Certainly the main banks have said that typically they expect to use the money to repay lending and then work with customers in relation to any new lending and repair and rebuilding activity."

Mike Davy, lending general manager at ASB, points out that until building work is done, the payout is paid down on the loan, lowering the customer's interest costs until the rebuild process is ready to begin.

New Zealand's insurers are endeavouring to treat policy-holders sensitively, but they don't have a lot of leeway to be lenient in interpreting the fine print because they have the international reinsurers staring over their shoulders to keep costs as low as possible.

There are some departures from usual claim treatment. AMI, for example, would usually manage the rebuild of homes damaged by fire or other accident internally. In the case of Christchurch it simply doesn't have sufficient staff to do this and has appointed a professional project management company, Arrow International, to handle repairs and rebuilds over the value of the Earthquake Commission cap. According to the Insurance Council of New Zealand, other insurers are also appointing project management companies.

There are two main types of house insurance policies. One is for indemnity, which means that you're effectively covered for up to the sum insured (or less if the house isn't worth the sum insured). These are often referred to as budget or basic policies. Full replacement value policies are more common.

In more normal circumstances an insurance company will choose the lowest cost option.

It may choose to make payment for what it estimates the cost of the rebuild will be, rather than project-managing a rebuild. Or it may require that the policy-holder organises the rebuild with the insurance company paying in tranches.

It might do this, for example, if the information provided by the policy-holder at the time of insuring wasn't correct. In one 2009 case highlighted in the Insurance & Savings Ombudsman's database an insurance company found after a house was destroyed that cover was underwritten on the basis of the floor area of a home being 120sq m. When an assessor looked into the case he found that the floor area was in fact 132sq m plus a large covered porch of approximately 28sq m. The insurer paid out an amount based on the average of valuations using the floor area stated in the policy.

One of the reasons insurers will organise for a house to be rebuilt is that usually they can manage the costs and pay out less in the long run. As one Titirangi homeowner found out, this isn't always in your interests.

The rebuild of his home was a "nightmare" from start to finish, with more than 100 faults identified, which had been signed off by the GAB Robins NZ assessor hired by insurance company Allianz to manage the claim.

The policy-holder had to fight for many of them to be fixed and found to his surprise that the assessor was there to limit the insurance company's costs, not manage the rebuild for the policy-holder.

The insurance company told Consumer at the time that "the contract for the building works is between the insured and the builder".

Even though there was a loss adjuster and engineer involved, the responsibility for monitoring the reinstatement is shared by the insured, who entered into the contract with the builder, and the engineer who brings its expertise to the supervision of the builders' work, Allianz said.

Consumer called for insurers to take greater responsibility to make sure rebuilds are done to a satisfactory standard.

AMI's products executive manager, Melanie Elliott, says the insurer will be offering four options to Christchurch home owners with premier "replacement" policies whose houses are beyond economic repair and are worth more than the EQC $100,000 cap:

Rebuild on the existing site

Rebuild on a different site

Buy a different property

Cash payment

The cash payment option might seem desirable, but in normal circumstances policies state that the cash payment is "market" or "present day" value, which isn't enough to rebuild.

It's inevitable in Christchurch that there will be some very unhappy policy-holders.

Some will have just cause for complaining against their insurance companies.

Others will be caught by the gotchas in insurance cover - such as a domestic garage not being covered by EQC if you don't happen to have a dwelling on the same property.

There will also be a lot of complaints to the Ombudsman in a year or two to come about how insurance companies have settled claims. With up to 100,000 claims being investigated, it's inevitable that a proportion won't go smoothly.

There will be those who want to get more than their policy actually covers them for or have outlandish notions of what they're entitled to. There is always one.

One policy-holder, for example, complained to the Ombudsman in 2008 because his house was deemed to be at "imminent" risk from damage to the land beneath it, which the EQC paid out on.

The policy-holder wanted a new home built, but his insurer refused to pay out because the house had suffered little damage. The EQC payment was sufficient to stabilise the land and repair the minor damage to the house, or to relocate the house to another site owned by the policy-holder.

History and the Ombudsman's database show that there will also be people who want their home replaced, but get repairs instead. Wouldn't you want a nice shiny new home in preference to a poorly maintained old one?

The decision to rebuild or repair isn't up to the council or whether it is green, yellow or red-stickered. The decision is an economic one based on whether it's worthwhile for the insurance company or EQC to fix or replace - although in Christchurch there will be cases where houses could be rebuilt, but the land is not suitable.

The insurance Ombudsman's files reveal a number of cases where policy-holders have wanted their properties rebuilt to a higher standard than they'd had before the insurance claim.

For example, in a 2001 claim an insurer rebuilt the policy-holder's house.

The local council insisted that a septic tank system, which had not been damaged by the fire, be upgraded to current requirements. The policy-holder argued that their replacement policy should return them to the "pre-fire position", which meant having working toilet facilities.

The insurance company refused because the septic tank system was not damaged by the fire and there was an exception in the policy that meant it wasn't responsible for bringing the house up to current building standards, just to pay for the property to be returned to the pre-fire position. The Ombudsman agreed.

The moral is: Make sure you understand what you're buying with insurance policies - especially if you have basic indemnity cover.