Advice and Opinion

Be aware of the pitfalls with home insurance

Property Finance Generic

Any home on which the buyer or the owner is granted  a mortgage by the bank will, except in exceptional circumstances, always have to have an insurance policy to cover its destruction by fire, storm water or other “acts of God”.  The value of this type of insurance has recently been amply demonstrated by the tragic fires at Knysna which destroyed many residential properties.

“As far as I know, no bank in South Africa will ever give a bond until the home is fully insured”, says Rowan Alexander, Director of the new Cape estate agency Alexander Swart Property – and, he adds, “that is as it should be: a home is far too big an investment to lose without compensation if a disaster does occur.”

Very often – probably in fact in the majority of cases – the bank will arrange the insurance and charge it to the buyer as an addition to his monthly bond repayments. However says Alexander, this can prove to be a more expensive arrangement than it should be, for two main reasons.

“Firstly”, he says, “the bank will often pay the full insurance premium at the start of each year and then charge the interest on it as an addition to the bond payments”.

Secondly and more seriously in many cases it has been found that the bank’s insurance charges are higher than those of the insurance companies serving the same market.

“The bigger insurance companies,” says Alexander, “have become very competitive in the home insurance business and their insurance packages can be anything from 15 to 50% lower than those of the banks.”

Alexander says that it is the duty of responsible estate agents and Conveyancers (including those employed by Alexander Swart Properties) to draw attention to possible discrepancies in insurance rates. “However, very often”, he adds, “the home buyer, grateful to have been given a bond by the bank, will be happy to go along with their insurance charges – and he has every right to do so”.

AS Property has a full time in-house insurance expert, Marina Loubser, a part owner of the independent company Uzuko Insurance Brokers.

Marina Loubser has pointed out that the usual home insurance policy covers the building and all the fixtures and fittings eg cupboards, lights, built-in stoves and certain woodwork but does not cover household goods and the owner’s possessions.

“Home owners”, she says “sometimes think that these are covered by the home insurance policy but need to be warned that this is not the case. A second policy has to be taken out for this purpose”.

A further warning from Alexander concerns the values that the banks sometimes insure the property for. “There is”, he says, “occasionally a tendency to apply an average valuation based on the extensive data which bank insurers have on housing in the areas they serve, but this “desktop” analysis may well fail to take into account a whole variety of factors which combine to make the house more attractive and more efficient. To get a true valuation it may be necessary to call in a professional valuer to give a second opinion. Home owners should resist the temptation to accept a low insurance valuation because if and when something does go wrong they may find themselves seriously under insured”.

“Similarly”, says Alexander, “home owners should realise that if the house is insured only for its replacement value not for its market value this may mean it is under insured”. He warns, too,  that the replacement value is sometimes itself inadequate because it makes no allowance for the demolition and removal of the damaged home prior to its being rebuilt. “This additional cost” he says, “can amount to an extra 20-30% on the replacement bill.”