One does not like to consider that an accident might happen and that their property will be damaged or burnt down in the event of a fire – and when they do consider such matters they often console themselves with the thought that the property’s value has been fixed by the bank and regular payments to the bank-related insurance agency ensure that they are adequately covered. This, however, is often not the case.
I have recently been involved in a case where a property, destroyed by a fire, was 15 to 20% underinsured because it was insured according to the replacement value rather than the market value. Although the insurers decided to go a different route, they could have legitimately based their pay-out on what is known as the ‘average clause’, which would make the owner have to pay in. This could have resulted in the owner having to find at least another 15% of the sum required to rebuild.
Instances of this kind have often caused severe financial hardship to owners who find themselves having to pay for a second bond, which they often do not get, or if they do get it, it poses huge financial stress on them.
After a few years of owning a property, it is essential to ask the bank to reassess its insurance value and, if necessary, to get an independent valuer to give his opinion on this matter. In addition, in today’s market, it is important to ensure that the insurance takes into account the replacement value rather than the market value because these two do not necessarily coincide these days, especially if the home is priced above R3 million.
I would also like to repeat a warning that I have given before about the importance of continuing to insure your home when the mortgage bond is paid off.
There have been a few tragic cases where the home owner, having paid off his bond, did not realize that, with its termination, the insurance contract came to an end. This was then only discovered when the house burnt down or was seriously damaged by a fire.