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Types of Home Insurance Cover and How to Avoid the 'Averaging' Method

For most people buying a house is their most valuable asset in life. Taking out insurance policies on your home is therefore vital to your financial well-being because your home appreciates in value. Furthermore you also accumulate household possessions inside your home over time, making insurance cover a necessity.

This article explains the two types of home insurance, namely: homeowners insurance, and home contents insurance. We also address key considerations to be made when taking out these policies to avoid being under-paid at claim time through the law of averaging.

Please take note Both these policies fall under personal lines insurance as it refers to individual insurance. Property mentioned here refers to residential property and home contents. This does not include business or office equipment i.e. separate business insurance may need to be considered depending on your insurance requirements.

Homeowners insurance

Homeowners and buildings insurance cover As the name suggests home owners policies are for people who have bought a property and need to insure against risks of loss to the property itself. Other terms used for this type of insurance include: insurance on dwelling structure, or buildings insurance.

What is important to note is that your coverage is limited to damages caused by certain events as described in your policy document − not any damage to your property! Some examples of cover include, storm, fire, flood, earthquakes, malicious damage by a third party to name a few.

Homeowners insurance is typically mandatory for bondholders buying property as the finance house/bank needs to protect their investment, and likewise it is to your benefit as well, as the value is high and worth protecting. Anything can happen in today's extreme weather patterns and of course accidents do happen.

Just some examples to illustrate the point:

  • Is your home near a coast line? What if there is a tsunami / flood or receding coast line that destroys your home or its foundations.
  • Is your home near big trees, man-made structures? Freak gale force winds, storms, major hail can all cause destruction to your home structure, blow off your roof, or totally destroy your home.
  • Are you situated near a previously mined area, a serious earthquake could destroy the foundations of your home.
  • A common veld fire or house fire could mercilessly destroy everything inside and around your home.

The possibilities are endless, not to harp on negatives, but to merely illustrate that we are not in control over any of the above, yet we intend keeping our homes for decades if not forever. This shows just how important this homeowner's insurance policy is in our financial and insurance portfolio. Certainly not to be overlooked at all because the risks are always there!

Some disaster risk scenarios through which a home owners policy may cover you: Fire, lightning, earthquake, explosion; Storm, wind, water, hail or snow; Impact of animals, falling trees, vehicles, aircraft; Bursting tanks, pipes; Theft of fixtures and fittings, etc .

Please take note Consult your policy document for confirmation of exactly what's covered!

Home owners policies also include extensions without further cost. These include things like architect's fees, demolition, removal costs, costs arising from submission of new plans to municipal regulators, all as a result of the initial loss. Check your policy document for a complete list of extensions too.

SA insurance companies offering home contents and buildings cover

Home contents insurance

A home contents insurance policy protects you against losses to items inside your home. This insurance is also called household or contents insurance. A contents policy will typically insure all the contents of a home that remains inside the home.

Then over and above this, you can specify other high value items that you'd like covered by the policy as well. All Risks cover is the term used to refer to items such as laptops, wedding rings and other movable assets that don't remain in the home all the time, but that you'd like covered as well in the event of loss.

These typically high value items must be specified as such!

Theft of cash is very limited on these policies. Check your policy document for more.

In order to arrive at a home contents coverage amount, one needs to spend time on figuring out just how much all your home contents are worth. Specify each line item from high value to low value; write out an accurate description of product name and next to it the value of the item.

Please take note Important to note, this is not the value that you paid for the item (if you bought it years ago) but the current market i.e. replacement value of the item. What is the value of the item now if you were faced with a loss situation and needed to go out and buy it today?

Sum up these values on your contents list spreadsheet, and that is the approximate value to insure your household contents at. Note that from an insurance risk perspective an event of loss may not always result in total loss of every single item that you are covered for, but maybe a few items. So know that the insurer will use this total value insured as the maximum payout amount in the event of loss LESS the excess that you have to pay in when making a claim, to arrive at a payout amount.

The law of 'averaging' method and how it affects both types of home cover

Your monthly premium to be paid includes a lot of summed up risk factors, and the rand amount of cover the insurer is willing to accept on your policy.

Please take note Some factors: area of your home, home occupancy hours, type of anti-theft measures in place − such as all windows and doors protected with burglar bars and gates − all affect your home contents premium.

The amount of cover you take on a home contents policy must reflect the true replacement value of all your contents. If you are underinsured the insurer will apply the average method to your payout.

Please take note If you are a pensioner who stays at home for many hours during the day you could likely be able to get a lower premium.

As you know market values are always changing, so it is a good practice for you to update your market / replacement values on your home contents once a year. Failure to do so will also result in underinsurance in the coming years.

Applied example

Home owners cover and under-insurance If you have furniture and other home assets to the value of R30,000 and took out a policy in 2010, chances are the value of those assets and furniture purchased now in 2015 is R60,000. This means that not updating this cover amount (and getting to a more accurate/fair premium) would result in you being under-insured.

Let's say you lost furniture to the value of R10,000 in 2015, but failed to update your cover appropriately over the years − the insurer will use an averaging method and pay 50% of your claim amount on the furniture, calculated as:

R10,000 claimed x (R30,000 total insurance) / (R60,000 total true value of all goods) = R10,000 x (50%) = R5,000 payout on your furniture claim.

As seen above, this R5,000 payout is R5,000 or 50% short of your required amount necessary to replace your furniture today. Therefore aim to avoid under-insuring and the resulting 'averaging' method that is applied to it.

Similarly the averaging method is also applied by insurers on homeowners policies if the sum insured is not in line with current market replacement costs and building costs to restore the property to its previous condition. Therefore the onus is on you to find out appropriate insured amounts on your property itself which is generally higher than just the market value, and then ensure that that figure increases over time with appropriate market values, replacement costs, and building costs at any point in the economic cycle.

Please take note As a general rule of thumb, your homeowners policy cover amount should be higher than the amount you paid for the property and more than the current market value at any given point in time.

If you are a sectional title owner check with your body corporate if your property is insured with homeowners cover, get a copy of the policy, then find the appropriate level of cover i.e. see if you need additional cover.

Tips to avoid averaging method (under-insurance) on home contents

Always ensure that the sum insured of your home contents reflects the true replacement value of all your contents as in the event that you are found to be under insured, your insurer will be entitled to apply average which will reduce the amount you are eventually paid out.

As the short-term insurance ombud says in a memorandum on his website, by all means keep a copy of invoices, receipts, written proofs of purchase and evidence of exact place and time of acquisition in respect of items. But don't be fooled into thinking that these have to be produced in order to get a claim payout.

But it is good practice for you to be able to prove that a certain item is valued as such and of that description. That will give you peace of mind to ensure that the insurer doesn't turn around and dispute the value.

For certain rare or high value or sentimental items take photographs of these together with any of the above and store in a safe place, off site from your home! Make sure these can then be quickly gathered at your time of claim.

Home insurance and renovations Always remember to contact your insurer regarding any change in your home environment. This includes renovations to your home, new equipment bought, or even alarm systems installed as it has an implication on your risk factors and therefore premium.

Remember household contents insurance cover generally represents a total figure for all items within your home, so if you acquire new pieces of furniture, other items of value over time, this will lead to underinsurance if you do not update your cover.

A good rule of thumb is therefore to update your home contents cover once a year OR as and when you add new items or furnishings

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