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What cover do I have for my house?

This memorandum seeks to correct a number of misconceptions which the public have about insurance cover for their homes. To start with, practically everyone who owns residential property must have this type of cover as the vast majority of us cannot afford to buy property for cash - we borrow money from a financial institution and pay it back (plus hefty interest) over a long time. As security for the loan, the financier has a Mortgage Bond registered over the property in its favour and in addition it will almost inevitably require that an insurance policy be taken out so that if the property is damaged or destroyed by any of the happenings insured against, its investment as well as yours will be protected.

Frequently, the Insurer with whom the policy must be taken out is very distinctly and closely related to the financier (although obviously it is not the same legal person) and this is a fact which can create problems, some of which are mentioned later.

Misconception No. 1 - The extent of the cover

The first and perhaps the most important misconception is the insured's belief that the houseowners policy covers him/her for any loss or damage that s/he may suffer as a result of anything that happens to the property causing physical damage during the period of when the insurance is in force. This is absolutely not the case and at the outset you would be well advised to carefully examine the detailed terms of your policy. Basically, the policy sets out a number of specific events which may occur and which if they do occur and give rise to a loss or damage to the property, the insurer will indemnify. In order for any claim to arise the burden of proof is on the insured to provide evidence, and to be able to demonstrate that the effective cause of the loss is one of the actual events specifically set out in the policy, for example, storm, fire, flood, earthquake (sometimes), subsidence (sometimes), malicious damage by a third party, etc.

Any damage or loss not falling within the limitations of the policy is not covered by the policy and of all the causes which may bring about such loss which are not covered, the most important and the ones which cause the insured the most unhappiness are damages arising from an inherent defect in the property itself, from bad or shoddy workmanship on the building of the property, or from failure to maintain the property in good order and condition, even though that failure may not have been a failure on the part of the insured at all but the failure of some predecessor in title.

Faced with an allegation on behalf of the Insurer that damage is in fact due to defective construction, inherent defect or failure to maintain, the insured all too often points to the financier (who may often be closely related to the insurer), and points out not without apparent justification, that when the loan was granted there was an inspection by the financier's experts which satisfied the financier that the property was good security for the investment and therefore if they failed to notice that the premises were inherently defective or improperly maintained, that is their fault and not the insureds. This argument has legal drawbacks - the answer for the financier will be that the inspection was undertaken for its purposes only and not to protect or to give any undertaking to the borrower and, secondly, that it is a person distinct in law from the Insurer and therefore whatever it did and did not do, will not affect the insurer's rights under the policy. The closeness of the relationship between the insurer and the financier may in certain cases cause the Ombudsman to consider an equitable recommendation that there should be some form of compromise, but as the law stands at the moment it is very difficult for the Ombudsman under these circumstances to come to the conclusion that the rejection of the insured's claim within the strict terms of the policy is not justified.

Misconception No. 2 - The value of the property

Everything that has been stated in Memorandum No. 13 which deals with house contents policies and the possible application of "average", applies with equal force to houseowners holicies. It is no argument for the insured to say that since the insurance was taken out for a particular sum even if the financier suggested that sum, that is the sum which must be paid if the property is destroyed. Increase in the value of residences and increases in building costs and reinstatement costs must be taken into account in determining what the proper insurance value is and this must be regularly looked at. Some insurers automatically apply a certain percent increase per annum to cater for these things, but that is a purely arbitrary percentage and may not meet the facts of any particular case. You should always look at the maximum amount of your Houseowners cover regularly and ascertain whether you are not in fact under-insured as a result of any increase in the value or of building costs or replacement costs, etc., which would make you liable to the application of "average" and to a reduction of the amount of any claim.

Misconception No. 3 - Who gets the money?

Although it is you who are the insured, the interest of a financier is always recorded somewhere in the policy, either as a co-insurer or by the insurers noting their interest and there is frequently an undertaking by you in terms of the policy that whatever is paid out in respect of a claim, if the insurer chooses to pay out rather than to repair, the payment is made in the first instance to the reduction of the liability to a financier and in effect towards payment of the outstanding balance on your mortgage bond, sometimes irrespective as to whether that balance is in fact due or overdue or not. The interest of the financier and of the insured are not always the same, and once again the closeness of the relationship between financier and the insurer can result in an unsatisfactory position insofar as the insured is concerned.

In terms of Section 43 (5) of the Insurance Act, a mortgage bond creditor is entitled to require you to take out an insurance policy of its choice provided that the premiums charged are comparative with other insurers.

Misconception No. 4 - The end of the cover

The cover exists in favour of the insured and in favour of the financier to the extent noted above. Subject to the terms of the policy, on the death of the insured his/her rights come to an end and the cover may automatically cease, unless the policy provides for the transfer of the rights and obligations to his/her estate. There is a similar situation if the property is sold and once the property is transferred into the name of the buyer the insurance ceases because there is no longer a situation where the insured is the owner of the property or has an insurable interest in it. Once the bond is cancelled or paid off this creates a difference in the insurance situation and the question which may then arise is whether the insured is now entitled at long last to get rid of the insurance which was originally imposed upon him and replace that insurance with another. A memorandum such as this cannot give detailed answers to all of these questions, but simply sound the warning that any change in the identity of the interested parties, in the ownership of the property insured and in the nature and rights attached to an insured property, may all bring about a situation where new cover is needed or the old cover has to be amended.

Misconception No. 5 - Sectional Title

Special considerations apply when you hold your property under "Sectional Title". Although you have separate title to your unit, which is insurable, the Body Corporate holds "the common property" and there is usually a composite policy which covers unit holders and the Body Corporate for their respective interests. Ensure that you are provided with a copy of this policy and check whether you need additional cover. It is not always easy, from a practical point of view, to establish between the Unit Holder and the Body Corporate, exactly where the risk of loss or damage lies.