By Natasha Osman, on behalf of The Banking Association South Africa
Different property types require different types of short-term insurance policies.
According to different property types, short-term insurance is differentiated as follows:
Sectional title properties can only be insured on a body corporate insurance policy and cannot be insured by the owner of the property.
Properties used for business purposes, require a commercial insurance policy or a policy which extends its sections to include cover required by small businesses which operate from a residential property.
Residential properties used for residential purposes only are insured on a homeowner’s insurance policy.
Homeowner’s insurance is offered as a short-term insurance product, to specifically insure your residential property, its fixtures, and fittings.
Homeowner’s insurance covers the property, its fixtures, and fittings. This implies everything that forms the structure of the property, which include but are not limited to, the building, domestic quarters, outbuildings, garages, carports, paving and property walls.
All insurance policies provide you with a policy wording or policy terms and conditions, which explain insured perils and what is covered and what is not covered by your insurance policy. Homeowner’s insurance covers you for sudden and unforeseen damages, caused by storm, fire, flooding, impact damage, bursting, leaking, or overflowing of pipes and geysers, as well as other perils.
What it does not cover is gradual wear and tear and where damage is caused by lack of maintenance of the property, defective construction, as well as other exclusions. It is advisable to read and understand your insurance policy, to be aware of what your property is covered for and what it is not covered for.
Which type of homeowner’s insurance is mandatory and which is not? Is this applicable to all segments of the market?
In South Africa there is no law which makes it compulsory for a person to insure their property. Most banks, however, do include homeowner’s insurance as a mandatory obligation of the home loan.
When you apply to a bank directly, through an agent or a mortgage originator for a home loan, the bank will request you to provide proof of comprehensive homeowner’s insurance for the full replacement value of your property before the finalisation and registration of the property. The purpose of this is to protect you and the bank from the risk of damage to the property, which could result in a financial loss.
Although it is not compulsory for you to take the insurance which is offered by the bank, agent, or mortgage originator, it is compulsory for you to provide proof of this comprehensive homeowner’s insurance to the relevant party and to have this cover in place for the duration of the home loan.
Homeowner’s insurance is not mandatory if your property is not financed.
What are the insurance requirements of a sectional title development versus a freehold property?
One needs to first understand the difference between a sectional title and a full title/freehold property. A sectional title implies that your property is part of a complex and you purchase the property itself within such a complex. A full title or freehold property refers to a property which is a free-standing property and when you purchase it, you purchase the full rights to the property, including the building and the land on which it is built.
The property type does certainly directly impact the insurance need for the property.
If you purchase a sectional title property, by law the body corporate must take out property insurance for the building structure. The premium is charged to the body corporate and they in turn charge the monthly premium as part of the levies, which the property owner must pay. The responsibility of insurance lays with the body corporate, in respect of a sectional title property.
With a full title/freehold property the insurance will be taken by you. The insurance policy issued is specific to the property, its fixtures and fittings and the insurance premium can be paid annually or monthly, dependent on your preference. The responsibility of insurance lays with you as the property owner, in respect of full title/freehold properties.
How would a homeowner go about finding out if they are adequately covered?
A homeowner needs to understand certain terms such as sum insured and full replacement value.
Full replacement value is the amount it will cost to rebuild your property should a total loss occur. This value considers additional costs, in the event of a total loss, such as rubble removal, engineer and architectural fees, hence making the replacement value higher than the market value of the property. It also considers the building structure, which includes, outbuildings, garages, swimming pools, walls/fences, security fixtures, paving and other permanent fixtures, such as solar panels and aerial and satellite devices. Further to this, it takes the type of wall and roof construction and the square meterage of the property, to calculate the replacement value. Most insurers offer a tool called a replacement calculator to help guide you in calculating the full replacement value. It is important that the sum insured on the policy is equal to the full replacement value, this prevents financial distress, as in the event of under insurance this will adversely affect you at the time of a claim.
It is also important to understand what perils are covered by the insurance policy, as well as benefits the policy provides. Most insurers have the same basic insured perils on a homeowner’s insurance policy, but some may have additional benefits that may be of value to have. It is also important to read your policy schedule which provides you with the excess structure. The excess is the first amount payable to the insurer in the event of a claim and differs in the market.
Is having property/homeowner’s insurance an important part of homeownership, if so why?
A home is the greatest and most precious asset a person possesses and a total loss of your property due to a fire or severe damage which may be caused by storms for example, could leave you in financial distress and unable to continue to live in your property. Homeowner’s insurance is therefore extremely important and very affordable in terms of the cover provided, giving you peace of mind in the event of an unfortunate loss.
It is important that you review your homeowner’s insurance on at least an annual basis to make sure you are adequately insured. Many homeowners’ will affect improvements to their homes (excludes on-going maintenance), and we emphasise the need for you to reassess your homeowner’s insurance cover when you effect such improvements/alterations.
Homeowner’s insurance is important and provides financial protection, in the unfortunate event of a loss, which affects your property, especially when you may not have surplus funds to rebuild your property.
If your home is mortgaged, the lender will require that you have home-owners insurance cover and that you cede this to them as this provides them with security in the event of damage to your home. It is however your responsibility to ensure that the insurance policy you have taken out provides adequate cover, the cover that the policy provides is comprehensive and that the insurance premiums are up to date.
In addition to financial protection for the entire property, when damages occur to parts of your home, you can register a claim and have the repairs effected, without allowing for further damage, whilst you wait for available funds to repair.
Your homeowner’s insurance also provides cover for alternative accommodation for you and your family, in the event your home is damaged and is uninhabitable.
If you have a tenant renting your property, homeowner’s insurance will also cover you for the loss of rent, from a tenant not being able to reside in the home, in the event of damage to the property.
About the author:
Natasha Osman is Bancassurance: Head of HOC (Homeowner’s Insurance Cover) at Absa Retail & Business Banking. Absa Bank Limited is a member bank of The Banking Association South Africa.