Insure your home for replacement value

Property 24 Newletter - 10 Nov 2011

Home insurance should be calculated on what it would cost to rebuild a property, not on its market value, said an insurance company on Tuesday.

"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," said Christelle Fourie, managing director of MUA Insurance Acceptances, in a statement.

Referring to recent research by Absa showing that building a home is often more expensive than buying an existing property, she said home owners could under-insure their properties if they only considered its market value.

The research found it was 29.5 percent cheaper to buy an existing home than to have a new house built in the third quarter of 2010.

If the rebuild cost of a property was not assessed properly, a home owner could suffer a huge shortfall if they filed an insurance claim.

Giving the example of a property estimated to be worth R1 million damaged by flooding, Fourie said: "When the insurer assesses the damage they estimate that it will cost R200,000 to return the property to normal.

"However, the assessor also determines that the property should have been insured for R1.5 million. As a result, the property has been underinsured by 50 percent and the insurer will therefore only pay out half the claim, leaving the consumer to make up the R100,000 shortfall."
The opposite situation could occur, where a home owner over-insures their 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," Fourie said.

A property in Clifton, Cape Town, could cost over R40 million, however the cost of replacing the actual building might only be R20 million, she said.

"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."

She recommended that home owners get their property independently evaluated when they want to take out insurance cover. - Sapa