24 Nov The tragedy of ineffective insurance
The catastrophic wildfires in Knysna earlier this year caused loss of life and damage estimated at more than R4 billion. Tragically, more than half of the 600 formal homes gutted were not covered by insurance, or were under-insured for the replacement cost of the buildings and contents/assets at today’s prices.
The lesson to be learned from this is that if you choose to have insurance, it needs to properly managed by experts such as the Safire network of brokers to ensure it is 100% suitable for the client’s needs. Terms and exclusions need to be carefully explained for total clarity. Cover also needs to be regularly updated in terms of the value of the assets covered and the level of risk that is encountered. Homeowners should review their insurance needs on an annual basis in addition to updating it whenever new assets including home improvements and high value items such as televisions, vehicles etc are added.
Lesson two is to never believe that ‘it’ll never happen to me’.
When tightening their belts, some clients opt for under-insuring their assets: research shows that about 40% of consumers are under-insured against major losses. This is a risky choice, because if you are under-insured, you will only receive a partial payout for a claim, because the principle of average is applied. For example, if you insure your household contents for R250 000 but the actual value of your contents is closer to R1 million, your insurer may pay out only 25% of your claim. You must obtain an accurate valuation of what it would cost to replace everything in your home, bearing in mind that a fluctuating exchange rate may influence the replacement value of imported household items.
Protect your most valuable assets
Your home is an invaluable investment, so it should be properly protected. Never ignore the unlikely but possible chance of damage by fire, flood or other natural disaster. While the probability of having your home completely destroyed by a fire is low, it is an event that could potentially ruin you financially. While people are often underinsured when it comes to household contents such as furniture, carpets, appliances etc, many are also underinsured for the value of the house itself, plus outbuildings such as garages and staff quarters. Costs change over time: the value of household contents will increase and constructing a new home will cost more. This is why an annual review is so important for accuracy.
In a nutshell:
* Discuss your insurance needs with an expert annually, advising them of any changes to assets when they occur.
* Ensure accurate insurance cover for your home.
* Always insure at replacement value, not market value, which is what you are likely to get in the open market if you sell your home today. Replacement value is what it will cost to rebuild your home as it stands at today’s prices. This is a factor affecting many of the homes lost in the Knysna fires: many were insured at market value only, and the owners cannot afford to rebuild, or not to the previous standard. Ensure that your cover includes the cost of professional fees including architects, engineers, quantity surveyors and project managers.
* Understand and abide by the terms of your insurance policy, which is a contract between you and your insurer. Play your role in managing your risk to avoid the contesting or repudiation of a claim.