Worries that high construction costs will leave homeowners with inadequate insurance

The rising cost of building materials may leave homeowners in the lurch as the risk of underinsurance rises across New Zealand.

Build a house frame
Photo: RNZ

Most home insurers use a fixed sum policy, which means anything over that amount won’t be paid if a home needs repairs or a total rebuild.

So, with construction costs continuing to rise, the amount that homes are covered for may not be enough.

Christchurch landlord Rachel hadn’t thought about her home insurance for years, until she and her partner decided to build an investment property just down the road.

The construction contract included clauses for a potential increase in material costs of 30%, but his insurance agent did not acknowledge this.

“We were really surprised that it didn’t match what we were spending or what we might have to spend on materials, because if building materials go up 30%…it’s not going to match what we’ve insured for .

“We’re at quite a bit of risk right now, so if something happens…the insurance we have now won’t cover if material prices have gone up even 5%.”

Data released by building products database company EBOSS revealed that the cost of building materials had risen by more than a third in the past 12 months.

Managing director Matthew Duder said they should climb at least another 10% over the next six months.

“And to be honest, it doesn’t matter what kind of material [it] that is, the increases are pretty consistent across the different categories.”

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All kinds of building materials put pressure on construction costs.
Photo: 123RF

Since the Canterbury earthquakes, most insurers have moved to capped sum policies for house rebuilds – getting rid of the risk of having to rebuild a client’s house at any cost.

A 2015 Treasury report estimated that since this change, the total underinsurance of New Zealand homes was around $184 billion.

Insurance Council chief executive Tim Grafton said owners should ensure their cover was appropriate.

“We are in a very high inflationary environment and particularly with respect to construction costs and building materials, some of them are in double digit inflation territory which would have a dramatic effect on the cost of rebuilding your home if the worst happens.

He said some insurers have implemented a 10% buffer for capital insured policies, which still might not be enough in today’s market.

The tower’s general manager, Blair Turnbull, said his clientele was not substantially underinsured, but admits the environment has changed rapidly.

He said that while it was the decision of the policyholder as to how much they insure, insurance companies should take responsibility for it.

“We certainly feel we have a responsibility to ensure that the coverage we have in place for our clients matches the asset. That’s why we provide tools that either accumulate a lot of data or capture data in real time to better reflect the value of this asset.”

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