How Insurance Works
People need insurance for a number of reasons, but mainly because they want protection in the event something unexpected happens. Being prepared is a small step that provides protection for you and your family if the unexpected becomes a reality.
Understanding Sum Sure
Home insurance is based on the reconstruction cost of your home. This is called your Sum Insured and it’s the maximum your insurer will pay to rebuild your home in the event of a natural disaster.
There are two main ways that you can calculate your sum Insured. The first is by using a free online calculation tool for standard homes. Or, if your home isn’t considered standard, you should consider consulting a builder, architect, quantity surveyor or other valuation expert to provide an estimated rebuild cost.
Up until August 2017 AA Insurance provided the free Cordell Online Calculator on this website. The calculator required customers to input the details of their home such as its size, number of storeys and construction materials. It would then use this information to provide an estimated typical building replacement cost for a standard residential home.
We appreciated that some customers were having difficulty calculating an accurate sum insured using this tool, which took considerable time and often left them uncertain the amount they calculated was enough.
So we made the move to Cordell Sum Sure, the next generation of free online calculator that provides an automated reconstruction cost estimate for a customer in less than five minutes. The Sum Sure calculator takes a lot of the guesswork, and time, away from working out your home’s sum insured by pre-filling your property’s key attributes for you.
Cordell, a CoreLogic Business, is a leading provider of building cost information in both New Zealand and Australia. AA Insurance is believed to be one of the first businesses in New Zealand to offer Cordell Sum Sure to its customers.
In most cases, all you need to provide is your property’s address in order to get a fact-based estimate. After receiving your address, the calculator automatically populates the rest of the information it needs about your home. Once you’ve checked this information is correct, or updated it, the calculator generates an estimated reconstruction cost for your home, including an allowance for professional fees, demolition, removal of debris and GST.
No, the purchase price of your home only gives you the cost that the market values your home at on the day, including the land that’s not covered by your home insurance, not how much it would cost to rebuild. It also does not include things like the cost of demolition and removal of debris of a damaged home, or the professional fees and building costs, including GST, to rebuild a home. Nor does it consider the costs related to current building codes like modern foundations, insulation and plumbing that may not have applied when your home was initially built.
Sum Sure considers all these costs and its database is constantly updated to reflect current pricing for things like materials, labour, overheads and profits.
Yes, in an event other than a natural disaster, AA Insurance may settle your claim using Replacement Cover, which means we’ll pay for the costs of the repairs to, or rebuild of, your home even if it’s more than the sum insured. We apply Replacement Cover to all home policies automatically. All you need to do is take reasonable steps to give us an accurate size for your home (like using a LIM report or other council authorised documents) and calculate an accurate sum insured (by using Sum Sure or a qualified professional).
For most standard properties in New Zealand, Cordell Sum Sure will give a fast, fact based estimate for your home. You will still need to check all the prefilled attributes of your home are correct, as some things may have changed like a recent room addition that’s yet to be recorded.
If your home isn’t standard – it may be architecturally built, very large, of high value, or has unusual or special features – then you may want to consult a building professional to help estimate an accurate reconstruction cost for you.
Top 5 contents insurance mistakes
People remember the obvious things – phones, TVs, computers – but forget the more obscure – cutlery, bedding, towels, clothing – when they are estimating the sum insured amount for their contents cover. If you suffer a total loss, like in a house fire, you may need to replace all your belongings - not just the things you think could be lost or stolen - and it can add up to more than expected.
Forgetting to specify things like jewellery or expensive bicycles or cameras is more common than you’d think. While these items will still be insured if they are lost, stolen or damaged, the amount of cover will be up to the event limit set by your insurer, unless they are noted separately on your policy schedule. Check your policy for the limits and items you need to tell your insurer about. Instead of specifying individual items, AAI has made it easier by asking customers to select an amount that covers all their high value items; otherwise the event limits apply.
It’s important to keep an adequate record of your possessions, so if you need to make a contents claim, you have something to back it up. Some clear, close-up photos of your belongings is a great and easy way to do this – walk around your house with your smart phone, and you can have it done in under half an hour. Upload these images to your email so you will always have a copy even if you lose your phone. Do try and keep relevant receipts also, and remember to keep them at another site, such as at work, or with your family for safe keeping. It’s a good idea to photograph receipts too, as sometimes the print fades.
It’s all too easy to buy a contents insurance policy then forget about it. But if you’ve purchased anything significant, maybe a big piece of sports gear, dining table, or a new TV, it’s a good time to check whether you need to update the sum insured amount for your contents policy. Most insurers offer an online contents calculator to help with this. And don’t forget that outdoor furniture, like the new lounge suite on the deck, or a gift such as expensive jewellery.
There are a lot of different insurance policies around, so it’s really important to read the policy so you understand what it covers, and what it doesn’t. Unfortunately, there are a few people who are disappointed when they need to make a claim, because they thought they had different cover than the policy specifies. A couple of exclusions or limits that often come as a surprise, yet are clearly outlined in your policy, are gradual damage, intentional damage, and no cover for those items that have been permanently removed from the home (ie gear you’ve stored in your friend’s garage).
Conversely there are often some surprises for what is covered, such as your legal liability for accidentally breaking something in a store or, if you’re an AAI customer, your child at boarding school accidentally causing damage to where they are staying.
If there is anything you’re not sure about, or are particularly concerned about, then talk to your insurer - that’s what they’re there for.
What is insurance and how does it work?
People need insurance for a number of reasons, but mainly because they want protection in the event something unexpected happens. The protection offered by our home, contents and vehicle policies can cover the replacement or repair of our customers’ belongings that they may not be able to afford themselves e.g. a kitchen fire, or the cost of the damage caused by others’ actions, such as rear-ending another vehicle. Without insurance people would need to pay for the damage themselves. They can manage the risk of loss or damage to their property by purchasing insurance, and let the experts take care of everything in exchange for an insurance premium.
It’s a common assumption that the money a customer pays for their premium is ‘kept aside in a separate box’ for when they make a claim. In reality, this money is pooled with all the other premiums and goes to pay off other peoples’ claims and cover the other costs of running the business. One in three of our customers made a claim last year, which was paid out of the pool of money. On average, a customer makes a claim on their insurance once every eight years.
The most common claims for vehicles include collisions or theft. For contents claims it generally involves lost or accidentally damaged hearing aids, dentures, reading glasses and mobile phones, while home claims most often involve damage caused by fire, electrical incidents and weather.
Reinsurers are the companies that insure the insurance companies. There are also companies that insure the reinsurers. Most are based overseas.
Each year we expect to receive a certain number of sizable claims and plan accordingly. This is the norm and our calculations help predict this. However, reinsurance protects against things that aren’t the norm, such as earthquakes and floods that are infrequent yet can be huge in terms of financial cost.
In addition to your insurance premium, you will notice that there are several levies such as those for EQC, the Fire Service and GST included in your invoice. They are additional to your insurance premium and your insurer is legally required to collect these amounts from you on behalf of government agencies
It’s worth noting that your insurer does not insure your land. Unlike other countries, residential land in New Zealand is covered by the Earthquake Commission, for occurrences such as landslips, and earthquakes. The EQC provides cover for the land on which your home is built, as well as a portion of the cost of your home.
If you have contents insurance, the EQC also provides cover for a portion of your contents.
The EQC provides cover up to $100,000 (+ GST) for your home, cover for your insured residential land up to an 8m perimeter around your home, and up to $20,000 (+ GST) for your contents.
This is only a very brief summary of how EQC cover works. Further information is available on the EQC website.
An excess is the amount you must pay towards a claim for each event that occurs and is covered by your policy. You would have had a choice of the excess you would like to pay at the time you took out your policy. The amount of excess you choose for your policy is a way to help lower your premium - the higher your excess, the cheaper your premium.
Understanding insurance fraud
Types of insurance fraud are as diverse as the people who commit them, and occur in all areas of insurance. They can range fromslightly exaggerated claims, to over-insuring the value of property, to deliberate accidents or damage. However the most common form is inflating the cost of a loss.
According to the Insurance Council of New Zealand, insurance fraud is estimated to cost up to $450 million each year. While the vast majority of customers are honest, and are treated as such, some customers commit fraud intentionally - the chief motivation being financial gain.
A generally honest person may unintentionally commit fraud, not realising that by exaggerating their claim that they are acting dishonestly. It doesn’t matter whether they are claiming for non-existent goods, inflating the price of goods, or adding in a few extra items into the claim. Fraud is fraud, no matter the size.
In one example, a customer made a claim for a stolen diamond bracelet that had recently been specified on their contents policy. After further investigation the customer acknowledged that the bracelet had never existed, and as a consequence their policy was cancelled.
Insurance companies provide cover for their customers in utmost good faith. If a customer submits false information when they take out a policy, or at the time of a claim, this is considered a serious breach of contract with their insurer. Their whole policy may then bedeclined, even the parts of the claim that aren’t fraudulent.
While the number of these types of claims that are declined each year is very small, the consequences for those people can be significant.
An insurer may go so far as to cancel each of the customer’s policies, which can make it difficult for them to gain insurance elsewhere. If a claim is declined then a customer will also have their name added to the Insurance Claims Register (with a specific alert for fraud) or, depending on the extent of the fraud, a customer may find themselves with a criminal record, which can also make it difficult for them to take out insurance in the future, and with it their ability purchase a high value asset such as a house, as banks require insurance as a condition of a mortgage.
Most insurers do not refuse to insure people simply because they have had a policy declined or cancelled. Every circumstance is different so the insurer will try to find out exactly what happened and make a decision based on that individual, not on an arbitrary basis. There are many situations in which an insurer is able to offer the person insurance.
Insurance companies approach every claim assuming that their customers are being completely honest. It is regular practice for every insurer to look further into some claims to help clarify details and quantify costs. This can help us better understand what has happened and the types and costs of the property that is being claimed for. This enables us to help our customers get their claim sorted faster.
However, on rare occasions, if a fraudulent claim is suspected, this will require further enquiry by a specialist fraud investigator. If a claim is found to be fraudulent, it will not be accepted and further legal steps may be taken.
In one example, a customer made a claim within weeks of taking out a vehicle policy. Over the course of the next 12 months he made four other claims for cars he had written off, and was about to make a fifth. After further investigation it was discovered the customer had a record of fraudulent activity that he failed to disclose, and committed these offences under a significant number of aliases. His policy was subsequently terminated, and the thousands of dollars that had paid out in claims were recovered.
Every cent paid out against fraudulent claims, like the example above, would impact on the cost of our customers’ premiums, making insurance unaffordable for many if the fraud wasn’t identified.
Insurance in New Zealand
Comprehensive car insurance covers the cost of damage to your vehicle, plus the cost of damaging other people’s cars and property. Many drivers take out Third Party vehicle insurance, as it is more affordable than Comprehensive insurance. Third Party insurance does not cover damage to your vehicle, but does cover the cost of damaging other people’s cars and property.
The high uptake of vehicle insurance in New Zealand is also related to affordability. The number of Kiwis with some form of vehicle insurance is comparable to those countries with compulsory insurance. It can be attributed to low standard excesses when making a claim, and the fact that personal injury is covered by ACC rather than by insurance companies, which helps make insurance more affordable. Other countries generally include a personal injury component within their insurance policy, which means higher premiums for customers.
Most New Zealand insurers offer home insurance based on, and limited to, a Sum Insured. The Sum Insured is the maximum an insurer will spend to reinstate a customer’s home in the event of a claim.
Corporate Communications Specialist (Public Relations), AA Insurance
Corporate Communications Specialist (Corporate Affairs), AA Insurance
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