A comprehensive guide to understanding these critical insurance concepts and how they affect your business coverage in New Zealand
When it comes to business insurance in New Zealand, understanding the difference between "sum insured" and "indemnity value" is crucial for ensuring you have adequate coverage. Many business owners confuse these terms, leading to underinsurance and unexpected shortfalls when making a claim. This guide breaks down these concepts in plain English to help you make informed decisions about your insurance.
The sum insured is the maximum amount your insurer will pay for a covered claim, as specified in your insurance policy. It's the figure you agree upon with your insurer when you take out the policy and represents the limit of their liability.
The sum insured is typically determined by you, the policyholder, based on your assessment of what you need to be fully protected.
Generally, a higher sum insured means a higher premium, but it also means more comprehensive protection.
In New Zealand, natural disasters such as earthquakes (through the Earthquake Commission) and floods can significantly impact sums insured. It's important to regularly review your sum insured to account for inflation and changing property values.
Indemnity value (sometimes called "current value" or "actual cash value") is the cost to replace or repair your property at today's prices, minus any depreciation. It's what your asset is worth in its current condition, not what it would cost to replace with something new.
The indemnity value accounts for wear and tear, age, and obsolescence. A 10-year-old building is worth less than a new one, even if rebuilding costs are the same.
Indemnity value is often used for commercial buildings, plant, and equipment policies in New Zealand.
If your sum insured is based on indemnity value but you need to replace items with new ones, you may need to pay the difference yourself.
Understanding whether your policy covers replacement cost or indemnity value is one of the most important decisions you'll make for your business insurance.
Replacement value insurance pays to replace your damaged property with new items of similar quality, without deducting for depreciation.
Indemnity (or current value) cover pays only what your item is worth at the time of loss, taking depreciation into account.
NZ Tip: In New Zealand, the Earthquake Commission (EQC) provides natural disaster cover for residential properties, but businesses typically need separate commercial insurance. Many NZ insurers offer "reinstatement" or "replacement" options as standard for commercial property.
Getting your sum insured right is essential to avoid being underinsured. Here's how to calculate it properly for different types of business assets.
Calculate the cost to rebuild your building at current New Zealand construction costs. This is not the market value – it's the reinstatement cost. Get a professional valuation or use the Rateable Value (RV) as a guide, noting that RV is often lower than rebuild cost. Consider council consent requirements and debris removal costs.
Add up the replacement cost of all equipment, furniture, fixtures, and stock at today's prices. Keep detailed records, photos, and receipts. For stock that varies seasonally, consider your peak inventory value.
List each item separately with its current replacement cost. Include specialized machinery, tools, and IT equipment. Consider future acquisitions – many policies allow for automatic cover increases.
Calculate your gross profit (or gross revenue minus variable costs) for 12 months. Add standing charges that continue during interruption. Consider the maximum period of interruption likely – typically 12 months, but some businesses may need longer.
Many New Zealand businesses are underinsured without realising it. Avoid these common pitfalls.
Using the rateable value or purchase price instead of the actual reinstatement cost. Construction costs in NZ have increased significantly in recent years.
Not including professional fees, demolition costs, escalation provisions, or GST (if you're not registered).
Failing to increase sums insured annually to keep pace with rising costs. Many policies offer "inflation adjustment" options.
Failing to update your sum insured after property improvements, new equipment, or business expansion.
Not understanding whether your policy pays replacement cost or indemnity value can lead to significant shortfalls.
Not calculating the true cost of being unable to trade, including ongoing expenses and lost profits.
Important: In New Zealand, the Insurance Council of NZ (ICNZ) recommends regular reviews of your sums insured, particularly after any significant business changes or following natural disaster events that may have affected reconstruction costs.
Our experienced NZ-based insurance brokers can help you understand the difference between sum insured and indemnity value, and ensure you have the right coverage for your business.