Are you insured for replacement value?
A new South African survey has revealed that it is almost 30% cheaper to buy an existing house than rebuild one. As a result, it is vital that homeowners consider the rebuild cost when insuring their property, rather than the market value, as they may otherwise be left severely underinsured following damage to their property.
Fourie says a home insurance policy should not be calculated on what you paid to purchase your home but rather on what it would cost to rebuild the property.
This is according to Christelle Fourie, Managing Director of MUA Insurance Acceptances, who says one of the most common mistakes consumers make is to confuse market value for replacement value.
She says a home insurance policy should not be calculated on what you paid to purchase your home but rather on what it would cost to rebuild the property. “A Victorian house in Parkhurst, with its original features intact, could easily cost more to rebuild than a swanky new development in Sandton.”
The survey published by Absa revealed that the price gap between building a new house and buying an existing one is now 29.4%. On average this means it is R437 500 cheaper to buy an existing home than have a new house built in the third quarter of 2011. This compares to a gap of less than 4% for statistics collated between 2006 and 2007.
Fourie says it is essential given the rapid rise in building costs for consumers to request an accurate assessment of the actual cost of rebuilding their property. She adds that this can be particularly crucial for affluent homeowners, as insuring luxury properties at replacement value can be a very difficult business, particularly if the insurer is not regularly exposed to the complexities and intricacies of this market. “Just replacing a complete Miele kitchen can cost in the region of R150 000 simply for the basic appliances.”
She says if the rebuild cost of a property is inaccurately assessed this can result in severe underinsurance, potentially leaving a homeowner facing a massive financial shortfall in the event that they need to file a claim.
For example, a property that is estimated to be worth R2 million is damaged by severe flooding. When the insurer assesses the damage, it estimates that it will cost R500 000 to return the property to normal. However, the assessor also determines that the property should have been insured for R3 million. As a result, the property has been underinsured by 50% and the insurer will therefore only pay out on half of the claim, leaving the consumer to make up the R250 000 shortfall.
Fourie also warns that while underinsurance poses serious financial problems for consumers, the confusion between market value and insurance replacement value can also result in the over-insurance of property. "It’s not uncommon for clients to pay very high premiums on a property purely as a result of the inflated cost of the land."
She says a property situated in Clifton, Cape Town, can easily cost upwards of R40 million, however the cost of replacing the actual building may only be R20 million. By insuring on the market value, consumers can end up paying an inflated premium, however, they will not be paid out a higher value in the event of a loss. It is therefore essential for consumers to insist on an independent valuation of their property to be conducted at the time of inception of cover and to then pay the correct premium.
"There are countless examples of major financial mistakes that homeowners have made when insuring their property, yet by employing the services of a qualified valuator and regularly reviewing the policy to ensure it remains accurate, one can avoid the worst of these errors," says Fourie.