Homeowner whose house was destroyed by cyclone only paid 'enough for half the rebuild'

Wednesday, 17 January 2024

A homeowner whose house was destroyed by Cyclone Gabrielle was only paid out half the cost of rebuilding his property – and there is a warning that others may be similarly exposed.

The man complained to Financial Services Complaints Ltd (FSCL), an external disputes resolution service.

He bought his first house in 2012 and used a broker to arrange the house insurance.

The broker wrote to him suggesting he review his cover to make sure he was adequately insured and the sum insured was right for his house. It said if he did not select a sum insured it would be calculated for him at a rate of $2000 per square metre.

After the Christchurch earthquakes, most insurers shifted from full replacement cover to “sum insured” policies.

This meant that people whose homes were damaged would be paid out up to an agreed amount, not necessarily the full cost of repair, as had previously been the case.

But the man did not opt to select his own sum insured.

Every year he was sent a reminder with the suggestion he use an online calculator, although on one occasion the broker used an incorrect email address to contact him.

His broker transferred his clients to another broker in March 2022 and the new broker sent an email to the man offering to make sure his cover was adequate but also used the incorrect address.

In February 2023, the cyclone destroyed his home and he was paid out $350,000. But he said it would take about twice this to rebuild the property.

The man said the brokers did not do enough to make sure he was properly insured and he did not pay attention to the letters because he relied on the brokers to tell him what he needed to know.

The broking firm said it had written to him every year encouraging him to check the sum insured was correct.

FSCL said if he had taken the time to read the brokers’ letters he would have understood what he needed to.

“It is a natural for a person to look back on events, with the benefit of hindsight, and think about how an adverse situation might have been avoided. However, on balance, we were not persuaded that, in the time before Cyclone Gabrielle, [he] would have acted any differently if he had received the emails from either his original insurance broker, or the broker that took over. Having disregarded the broking firm’s letters we considered it likely that [he] would have disregarded email contact from his insurance broker as well.”

FSCL financial ombudsman Susan Taylor said her scheme had not received many complaints about this issue yet.

“However, with the recent high level of increases in building costs, we think it is an important message for consumers to regularly review their sum insured. As extreme weather events seem to be becoming more common in New Zealand, more consumers may find themselves unable to rebuild their homes as a result of their sum insured value being set too low. We encourage people to talk to their insurance broker or insurer to check their sum insured is up to date.”

Insurance Council chief executive Tim Grafton said there was no doubt that a number of people would be under-insuring their houses.

”It generally only becomes a problem when the property is a total loss as that is when someone needs the insurance proceeds to pay for a new home, but clearly that problem is one no one wants.

“If under-insured, they either get a smaller home or bridge the gap themselves. Over the last couple of years construction inflation has been running well ahead of the CPI. Off the top of my head, it was about 16% in 2022 and just under 10% in 2023, so clearly that would have a major impact on the sum insured.”

He said the Insurance Council encouraged people to use a calculator to work out their sum insured or hire a quantity surveyor.

“We stress that the rebuild cost is not the market value or the rateable value of the property, but the actual cost of demolishing, removing debris, designing and rebuilding the property. Properties on hillsides will be more expensive to build, so location matters, too.

“Another challenge for property owners is what happens when your house has been damaged by a landslip. Landslip damage is becoming more frequent as a result of extreme weather events. Landslip damage is covered by Toka Tū Ake EQC. You get up to $300,000 excluding GST for damage to the house due to the landslip with private insurance covering the rest up to the sum insured and you also get a sum for the damage to the land itself from EQC.

“It’s a complicated formula that most people don’t understand, but as land damage is not covered by private insurers anywhere in the world the EQC payment is all anyone can get. The calculation of the payment reflects the value of the land which of course varies around the country. Some people may experience the payment from EQC is not sufficient to remediate their land so they will need to bridge that gap themselves.”