A house is probably one of the most expensive purchases consumers will make in their lifetime. It is therefore vitally important to fully understand the insurance implications when purchasing a new home so that you can ensure you are financially covered in the event of any loss or damage.
Step one: start date of the cover
The most important insurance advice for a new home owner is to ensure that you have arranged for the cover to start on the day transfer takes place. Some insurance companies may even insure your property if you have taken occupation, even though the property transfer is not finalised yet.
Warning: high premiums ahead
When insuring a new home, consumers often do not realise that non-standard construction types, such as a thatch roof or wooden structures, will automatically mean a higher insurance premium as these are considered a higher fire hazard. Historic properties may also be more expensive to insure as they will usually cost more to repair. If you are looking to reduce your insurance premiums, it may be best to avoid houses that fall into this category.
Complex issue
If you are purchasing a house in a complex under a sectional title, the building will be covered by the body corporate building insurance policy and premium payment usually forms part of the monthly levy. Always ask for a copy of this policy as it may exclude certain cover such as damage caused by geysers, in which case you may need to take out your own insurance against this.
Review the surrounding area
It is a good idea to find out if the area you are buying in is considered high risk for subsidence or landslip damage or if the property has suffered similar damage prior to sale. Banks often require cover against damage caused by subsidence or landslip before they can approve the loan. You may also not be able to get insurance cover unless a geographical survey is completed. The onus usually rests with you as the homeowner to ensure the survey is conducted.
In addition, it is prudent to find out whether the property has been exposed to flood claims in recent years, especially if it is located near the sea or on river frontage. Certain areas in South Africa have become uninsurable from a flood risk perspective and this could severely impact on the ability to insure against these risks and the resale value of the property.
Mitigate underinsurance risks
When you purchase building insurance, you are covered for everything except the land. Understand that the amount you insure for will be the replacement value of the structure, including outbuildings, and not the market value of the property. Your insurance may therefore be less than the value you actually purchased the property for.
It is important to ensure that the replacement value includes all costs, such as the clearing of rubble and architects’ and surveyors’ fees, or you may not be able to rebuild the exact home you had before. Also understand exactly how your insurance company determines insurance replacement costs, as this may vary from insurer to insurer. Some insurance companies or underwriters, like MUA, offer a voluntary valuation of your property at the inception of your cover to determine the correct insurance replacement value and as a result avoid the risk of underinsurance.
Be aware that most insurance companies will apply the average condition to your settlement amount in the event of underinsurance and that a relatively low underinsurance percentage of say 20% on a R2 million home can have a devastating effect on your personal financial situation if you are faced with a R1 million fire loss. In this instance insurers may deduct as much as R200 000 from your claim.
Policy basics
Find out if your policy is an all risks cover or perils only cover. All risks policies cover everything except the exclusions specified by the contract which means you have a wider cover.
Ask your broker what improvements can be done to reduce your premiums, for example, installing additional security measures such as an alarm or smoke detectors could ensure you get a discounted rate. It is also possible to reduce your premiums by taking a higher excess or deductible.
If you run a business from home or rent out the home as a holiday house for additional income, ensure your broker and risk carrier are aware of this because you may need specialised liability cover.
With these tips in mind, you can avoid any insurance pitfalls and make an informed decision when insuring your new home. Remember, it is always best to seek the advice of a financial advisor who is familiar with the necessary requirements for insuring a home.