Low insurance value

John asks:
(updated on Wednesday, December 24th 2014)

I rent out three flats in one 1930s' brick building. The insurers have just reassessed total replacement cost and told me I need to pay premiums of around $5,000 for a total rebuild cost of $700,000. The value of the building is less than $150,000. It is partly mortgaged. I'd like to be able to insure it for $150,000 plus demolition costs. Do you know if anyone will do that or have you any suggestions about reducing my insurance costs? Thanks for any advice you can give.

Our Experts Answer:

For the purpose of this question I will assume “building” means a dwelling/residential flats and not a commercial building. Replacement (rebuild) value is quite different to market value. Factors like age and design of the dwelling, slope of the land and location are considered when calculating rebuild costs (and therefore the sum insured). Market value is driven by demand/supply in the area.  For example, two dwellings are identical in every way, but one is in central Auckland and the other is provincial. While the rebuild costs (and therefore sums insured) should be the same, the market values would vary due to location.
Setting the sum insured correctly is extremely important as it’s the maximum payable should a total loss occur. Something else to consider is what happens in the event of a partial loss, where the home is not written off and the damage can be repaired? Say if a fire destroyed two thirds of your building, would the $150,000 be sufficient to repair the damage? Insurers have to take partial losses into consideration when setting the sum insured as they must carry the exposure for all partial loss claims such as impact damage, burst pipes, storms and floods. Also, repairing damage around an existing structure can sometimes be more expensive than starting from scratch. Of course they also still carry the exposure for the dwelling as a whole. Check with your bank also as to what insurance is required.
It will be very difficult, if not impossible, to find an insurer who will provide the level of cover you require as this would probably be considered blatant underinsurance. To keep costs down while insuring the building correctly, your options to consider include taking a “restricted” type policy (only covers specific events e.g. fire, storm, flood, etc.) or a higher policy excess. If your policy is exclusive of GST, by deducting 15% from the sum insured the premium will be calculated on a smaller amount but won’t compromise the amount of cover. A reputable insurance broker will be able to provide advice and solutions for tricky situations like this one.

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