Disaster a reminder of the risks Kiwis run if they under-insure their homes
Kiwis are risking their homes by under-insuring and failing to understand their cover.
The earthquake in Chile reminds us just how devastating natural disasters can be. And we are living smack bang on the Pacific Ring of Fire, which was responsible for the devastation in Chile last weekend.
I've been reflecting on the Chile earthquake this week and how my family would cope in the same situation.
Chile is the 46th wealthiest nation in the world and is not that different from our own country - unlike Haiti, which is an economic basket case.
After email exchanges with a friend in Chile this week, I bought bottled water from the supermarket to store in case of an emergency that cut off our water supply. Thankfully my house is built of wood and steel, and is unlikely to collapse in an earthquake as many Chilean homes did. That's not to say that it couldn't be destroyed by fire or tsunami - we are only a metre or two above sea level.
This got me thinking about home insurance. Although 95 per cent of New Zealand homes are insured, not all of those are adequately covered in the event of a total loss, or a very major rebuild. Nor do most people understand the cover offered by the Earthquake Commission.
Do you know, for example, how much a total rebuild of your house would cost? And how did you come up with your sum-insured?
It's mostly academic if you have replacement cover, but not if you have fixed-value insurance. Most insurance companies offer both policies, giving people the choice. The fixed cover will pay only up to the sum insured and no more.
Christopher Ryan, chief executive of the Insurance Council, says although most people go for comprehensive cover, not all do and those who don't might be surprised at how much it costs to rebuild their homes. Some won't even know which option they have.
"About five years ago the insurance industry changed the contracts to say that unless you say otherwise we will cover you for replacement. We did this because we were finding real problems with people whose houses burned down and we would only pay half the cost of rebuilding [because that is all the cover people had taken out]."
Having said that, taking the fixed-value cover makes sense for people who are short of cash because the likelihood of a total loss of their home is relatively small, says Ryan.
"It is much more likely that you will have a minor fire and your kitchen might be destroyed at a cost of $60,000." This would be covered under the fixed policy.
Very few people know exactly what the Earthquake Commission (EQC) covers, despite paying annual premiums. The EQC was established in 1945 to provide earthquake and war damage cover to anyone who bought fire insurance. The war damage part was later dropped.
It covers damage to homes and contents by earthquake, natural landslip, volcanic eruption, hydrothermal activity or tsunami.
Flood damage to land is covered, but not to buildings or contents, says EQC insurance manager Lance Dixon, because this is covered under people's regular building insurance.
Not everyone is automatically covered. You need to have home and/or contents insurance. Otherwise you're out in the cold in the event of a natural disaster.
The thought of "the big one" encouraged me to set up a direct debit to AMI to ensure I couldn't forget to pay my annual premium. That's not to say I simply let the insurance roll over every year without shopping around.
But it ensures I can't accidentally forget to pay - as I have in the past.
Insurance companies often accept claims even if you have let the insurance run out. I wouldn't like to be in the situation, however, of arguing the case after my house had burned down.
Just how catastrophic a big earthquake could be to New Zealand homeowners is spelled out by the EQC's modelling. In the event of an earthquake the size of last year's Fiordland quake of 7.8 on the Richter scale hitting a major centre such as Wellington, the EQC expects claim numbers of about 200,000.
The EQC only covers homes up to a maximum of $100,000 plus goods and services tax (GST) and personal effects are insured up to $20,000 plus GST.
That's not enough to rebuild most homes, but still not a huge problem because house insurance in New Zealand contains top-up cover for earthquakes, says Ryan.
The top-up covers damage to your property or contents by earthquake, natural landslip, tsunami, volcanic eruption or hydrothermal activity.
When I checked AMI and State Insurance policies this week, earthquake top-up was automatically included in both the basic and comprehensive home policies.
But it is essential to double-check your own policy.
That does mean, however, that in the event of a large natural disaster claim homeowners can find themselves having to make two claims and deal with two assessors.
It doesn't take a huge quake to cause a lot of damage. The 6.8 magnitude Gisborne earthquake in December 2007, which was centred 50km offshore, resulted in significant numbers of payouts.
In one case a collapsed chimney alone cost $160,000 to repair, says Dixon. And the EQC limit of $100,000 had to be paid out 24 times in an apartment block which was severely damaged but survived structurally.
As always there is fine print the homeowner needs to read in both the EQC and regular insurance policies.
For example, the State Insurance Essentials policy, which is typical of many, only pays the top-up if the Earthquake Commission has agreed to cover your loss.
So if the EQC declines your claim, so usually does your insurer.
Another concern is that some homeowners may mistakenly think they are covered for erosion, subsidence, flooding or slippage when they're not. If the title of their property is endorsed with what is called a Section 74 notice under the Building Act (also a section 36 endorsement under the earlier 1991 Building Act), then they will not have cover under the EQC.
These notices relate to buildings that have been granted consent by the council, but the land is "likely to be subject to erosion, avulsion, alluvion, falling debris, subsidence, inundation, or slippage". A lawyer should pick this up when checking the LIM. It's a good idea to also read the council file whenever buying property.
These covenants also must be disclosed to your insurer, says Ryan. That is because, as State's policy says in bold: "When you apply for insurance with us, you have an important 'duty of disclosure'. This means that you must ... give us all the information that a prudent insurer needs to decide whether to accept or decline your application for insurance ... even if you think it isn't important.
"If you don't tell us, your insurance policy may not be valid and you may not be covered if you want to make a claim."
Most policies are relatively straightforward to read. If you don't read your policies and understand them, you are jumping into the snakepit. Consumer NZ last year reviewed some of the traps to avoid, over and above those mentioned here. For house insurance (not contents), the list included:
* Damage such as fire caused by a tradesman may not be covered under your household insurance.
So always check that a builder belongs to an industry body, which offers guarantees. Also check that the tradesman has public liability insurance.
* Gradual damage such as rotting structural wood is not covered by your policy, or the cover may be severely limited. Every year the Insurance & Savings Ombudsman deals with numerous claims declined by insurers for this reason.
It is not unusual for homeowners to fail to find structural damage until timber is rotten. Yet for a valid claim to exist the damage must result from a sudden identifiable event.
