Leading quantity surveyors have identified a widening gap between the per-square-metre default rebuild cost, assumed by insurers, and the actual cost of rebuilding as estimated by quantity surveyors. An issue that has, and will continue to see many homeowners underinsured should the worst happen.
When we talk about the total cost to build there are shades of grey around what it covers. Does the price include: professional fees, landscaping, GST and more, or simply the cost to build the structure in question?
While the total build cost being quoted in the marketplace tends to be the cost of building a house, when it comes to your total replacement insurance value, the cover is more than just building a home.
It is the build price plus paths, patios, decks, fences, driveways, built landscaping, demolition of damaged existing structures, professional fees, council consents, service connections, land remediation and the list goes on.
So with such a variance between what the marketplace terms cost to build, and your insurance policy, how do you ensure your insurance payout is going to stretch far enough to cover what you are entitled to should the worst happen?
There are three key influences when it comes to square metre rates – size, quality and detail, or what I like to refer to as architectural-ness; the design elements and solutions that are put in place to achieve an aesthetically pleasing and space efficient structure.
While the size of the home is dictated by the client, the other two can vary significantly from one 250sqm house to another. While one may have a per square metre rate of $1,700, the other might have a per square metre rate of $6,500 or more – highlighting the many shades of grey when comparing one house to another, whether they are the same size or not.
Essentially, insurance companies appear to have taken total build costs and worked out
an average square metre rate for rebuilding. For example, for homes estimated to cost $400,000 - $500,000 to build, the insurance pay out price is $1,850 - $2,300, well below the $3,530 per-square-metre rate deemed adequate by quantity surveyors in a recently published article.
While at a glance the insurance pay out rate may seem substantial, it fails to take into account the individual aspects and unique attributes of what once was.
When talking to my insurance company recently to discuss my repair cost following the Canterbury quakes, not only could they not identify what was covered within the square-metre-rate being offered, they didn’t know the size of my site or the quality, age etc of any specific features.
They had simply identified a figure based on an average 170sqm house that was unreflective of the street, site, composition and architectural details that make up my home.
The insurance square metre rates are poorly informed and generic. Not only do they fail to recognise that every house and every site is different, they lack knowledge around whether the site requires groundwork repair or not.
And as we know from recent events, while one site might be fine, five doors down it can be a totally different story with the site requiring detailed groundwork repair and foundations to make it adequate for rebuilding.
The system that has been put in place to generate these payout figures is lacking in sophistication as it fails to recognise loss and what stood before.
While, insurers must lift the square metre rebuild cost, as homeowners we must look beyond accepting the default rate. Our homes are our biggest asset, we should be protecting ourselves more by getting them and our property valued. By engaging a loss expert or quantity surveyor you can guarantee you are putting the right steps in place to ensure your property is insured adequately – because can you really afford not to?
With the insurance policy figures set to dictate what homeowners can rebuild, it can and will, see homeowners forced to build smaller, and perhaps without the quality that they once had. More than likely, seeing homeowner rebuild a home that is worth less than the outstanding monies owned to their banks on the mortgage.
My question here then, is at what point will the lender be satisfied that the potential margin of error in what is being paid out for replacement is adequate, or are the current actions of the insurance companies indicating that our banks are more interested in what we owe, than our equity?