Beware the possibly catastrophic effects of under-insuring your home and its contents.
One of the most important aspects of home insurance is to avoid being under-insured and having what insurers call the “condition of average” applied when you claim.
● What is under-insurance? Hollard’s Deanne van Doesburgh says you are under-insured when your goods or your house are insured for less than it would cost to replace them. Low insurance will help towards recovering some of the losses, but there will still be a shortfall.
“Replacement value refers to what it would cost you at the time of a claim to replace damaged items with new ones.”
● What is the condition of average? When assessing a claim, the insurer will work out if you were under-insured and by how much. If you were under-insured then only a part of your claim will be paid out of after the principle of “average” has been applied. The formula is: (sum insured ÷ replacement value) x the amount of total loss.
For example, if your home’s contents are insured for R300 000, and the actual replacement value of all the contents is R600 000, and a burglary sees goods worth R60 000 stolen, the claim amount will be calculated as follows: (R300 000 ÷ R600 000) x R60 000 = claim amount payable of R30 000. This means there will be a shortfall of R30 000 because the home contents were under-insured by 50%.
● How to avoid under-insurance: Take an inventory of all contents each year and attach a replacement value. The home contents sum insured should reflect the cost of replacing the entire home’s contents with new items.
● Insure buildings at replacement value: determine what it will cost to replace the building, granny flats, sheds, paths, driveways, pools, walls, fences, gates and play areas should they be totally destroyed.
“There is a difference between the market value, which is what you would get for your home if sold, versus what it would cost to rebuild it to the same standard at today’s prices,” Van Doesburgh says.
● Update your sum insured regularly: Replacement value changes over time. This could be due to inflation as well as exchange rates which affect the replacement values on imported goods.
“This is why annual reviews are essential. If necessary, ask your insurer to arrange a professional evaluation.”
● Pay attention to items you remove from your home: You will need portable possessions cover for these items which is different from home contents cover, Van Doesburgh says. Examples include jewellery, watches, sunglasses, cellphones and laptops.
“If you have portable possessions, insure them so you are covered whether an event happens in or out of your home. If you only have home contents cover for these items you will only be covered if the event happens at your home.”
● Always insure for worst-case scenarios: Insurance is there to give you peace of mind in the event of total loss as a result of, for example, fire or flood. Make sure you have insured all your items and not just what you think could be stolen in a burglary.
“The devastating fires experienced in Knysna are proof South Africa is not immune to natural catastrophes in which one could lose everything.”