Insure your home for its correct value or pay the price

Insuring your home for replacement value means your insurer will cover the costs of rebuilding your property to its original dimensions and quality in the event it is destroyed or damaged. Yet inflation sees the cost of building increase every year. As such, home owners should regularly update their policies to avoid being underinsured and having to make up the difference themselves in case of disaster.

Inputs such as raw materials and labour along with professional services like architects, project managers and electrical contractors become more expensive over time. This has direct implications for the amount that home owners should insure their buildings for. If homeowners are underinsured they will only be paid out for the proportion of the value that they have been covering. This will “leave you to make up the difference between what your insurer will pay and the full cost of restoring your house in the event of disaster” says Gari Dombo, Managing Director, Alexander Forbes Insurance.

In short, the sum insured should:

· Include the cost of rebuilding all the buildings (including outbuildings) on your property from scratch

· Factor in any inflation that will occur during the insurance year

· Include escalation in cost of material and other inputs during the course of the construction

Any estimation of rebuilding costs or valuation of the new building should be dated and include all the above considerations and calculations.

Home and property owners should also be aware that “the market value of your property, or what it can be sold for, has no bearing on what it might actually cost to rebuild” says Dombo. Market value includes the value of the land and area and should have little bearing on the sum insured.

It should also be remembered that the insurer has no obligation to automatically adjust the sum insured on behalf of clients - even though some helpful insurers do this.

Also, homeowners should not just opt for a standard inflation-based increase. Instead, Dombo believes that homeowners should do the sums themselves each year as “if the original base sum insured is incorrect, the new sum insured will still be incorrect even after factoring in inflation” says Dombo. Policy holders should therefore revisit their base insurance values – at least every 5 years if the insurance company does the automatic increase, and every year if they do not.

In practice, however, most financial institutions decide on the sum insured on behalf of their clients when their clients register a bond. That said, Dombo urges bond holders to

carefully consider the amount that their bank has insured their homes for since a banks’ primary concern is its own investment - or the bond outlay. “Over time, however, the buyer builds more equity into the home than the bank holds in it. If it is destroyed the pay-out may not be enough to achieve full replacement even though it may cover the bond” warns Dombo.

In conclusion Dombo suggests that home owners “ask their insurer to refer them to a qualified valuer or seek the opinion of a quantity surveyor or builder in their area.”