This article was first published in the third-quarter 2015 edition of Personal Finance magazine.

Much is said, done and debated about the insurance of household contents and motor vehicles in South Africa, but immovable property is … well, mercifully immovable and therefore relatively low risk. Take the list of risks covered by buildings insurance from iWyze, the short-term insurance division of Old Mutual:

* Fire, lightning and explosion;

* Malicious damage;

* TV aerials, satellite dishes and masts;

* Bursting, leaking or overflowing pipes, water apparatus or oil-fired heating apparatus;

* Storm, flood, wind, water, hail or snow;

* Earthquake;

* Loss or damage to the private residence caused by impact;

* Theft or attempted theft;

* Gradual sinking of land (subsidence) and landslip of the land supporting the private residence; and

* Damage by wild baboons or monkeys.

It might sound more and more improbable as the list goes on, but the previous owners of the very house in which I am sitting returned home one day to see a large baboon sitting on the roof draped in the duvet from the main bedroom and munching on bananas they rightly guessed had come from their own fruit bowl. The wreckage inside the house was significant and included smashed louvre windows, damaged internal doors and ruined carpets.

Such risks might be relatively small, but the potential cost of the events on iWyze’s list is large in inverse proportion to the risk. Even a geyser burst in the roof space above a main bedroom can cause extensive damage, resulting in many hours of costly mechanical drying and, potentially, the expense of replacing the ceiling, built-in cupboards and fitted carpets. A fire or flood is a catastrophe that only a good insurance policy can help you to get through – and all the better if the policy includes emergency assistance, so you are supported through the process.

Since sectional title properties are insured collectively, we are focusing on the insurance of individual freehold properties only in this article.

What is a good policy?

Homeowner’s insurance covers everything that is permanent and immovable within the boundary of your property, including the perimeter wall, the garage and gate and the motors that power them, outbuildings, swimming pool and/or borehole and associated pumps, and all the fixtures and fittings in the house or flat itself. The cover should also make provision for an increase in building costs over the forthcoming year, professional and municipal fees, and, in the worst-case scenario, demolition and plot clearance.

This class of insurance is much more complex than you would expect ... until you think of the infinite variety of homes in South Africa and all the conceivable causes of loss or damage. Every insurer has lists of covered events, excluded events, imaginative extras and optional add-ons, but the first, universal rule of insuring the building(s) that constitute your home is that the insured value should reflect the cost of replacing your home in its entirety – that is, the new value, not the second-hand or market value.

Christelle Fourie, the managing director of MUA Insurance Acceptances, says underinsurance is the biggest risk factor homeowners face. She cites a survey by Qantum Risk Assessment, which concludes that the average homeowner’s property is underinsured by as much as 35 percent. “Property is perhaps one of the most difficult assets to determine a replacement value for, because a rebuild is dependent on so many varying factors,” she says.

When a claim is received on a property that is underinsured in the judgment of the assessor, the insurance company applies the “average” clause, which means that the homeowner is regarded as sharing the liability to the extent of the underinsurance. This principle operates throughout the short-term insurance industry as a means of protecting the insurer against underinsurance and is explained in the terms and conditions of every policy.

If your home is underinsured by 35 percent, for example, the insurer will reduce the claim payout by the same percentage, and you will have to make up the balance. However, if you are overinsured by a similar percentage, no similar calculation applies – you will not receive more than the claimed amount.

Fourie says the most common mistake consumers make is to confuse replacement value with market value. “A Victorian house in Parktown, with its original features intact, could easily cost more to rebuild than a swanky new development in Sandton,” she says. On the other hand, a cottage in Clifton might have a market value of R40 million but cost a fraction of that to rebuild, because market value in that area is all about the location. In the first case, you could find yourself unable to replace the house in the original style; in the second, you could pay inflated premiums for years without getting anything back, Fourie says.

Replacement value might be the linchpin of buildings insurance, but don’t expect to hear it from the insurance companies’ call centres.

I contacted four insurers directly for a home-owner’s policy – Santam and Outsurance, respectively the biggest and second-biggest short-term insurers in South Africa, iWyze and Alexander Forbes – and none of them mentioned replacement value or warned me of the consequences of an inaccurate valuation. Nor, when I asked, could any of the call centres offer any advice on how to value the house correctly. “We don’t send out assessors; what did you pay for it?” was the brisk reply from Outsurance.

In the end, I guessed a replacement cost of two-thirds of the purchase price for the sake of expediency and was assured that the valuation could be adjusted later, after the insurance was safely in place. Besides, said one helpful call centre agent, anything up to an extra R1 million of cover results in only a relatively small hike in the premium. So the risk of overinsurance is favoured over the risk of underinsurance … by the insurance companies, at least.

Help with your valuation is available, but you will have to seek it out yourself (see “Routes to replacement value”, below). But why? The need for insurance companies to value properties before a claim arises seems clear, but, as the Outsurance representative put it bluntly, “you won’t find one that does”.

“Correct,” Ernst Gouws, the managing director of Outsurance, says. “We don’t send out assessors, because very few clients are keen to pay for this cost – and it is also substantial compared to the average buildings premium. It would therefore imply higher premiums, which clients don’t want to pay.”

Another argument is that short-term insurance is just that – short term – so consumers are entitled to cancel or amend their policies at any time, move to another insurer offering a cheaper premium, or reduce their cover as they wish. That could mean a lot of wasted time for assessors.

And, as Gouws says, “even if one had a very accurate sum insured at the outset, it would not necessarily mean no issues at claims stage. A house may be on cover for many years before there is a claim, and over that period the sum insured may well get out-dated, because the client made additions to the house (adding a swimming pool, for example), or the sum insured was not adjusted each year to allow for building inflation.”

The extent of repudiations and reduced payouts also depends on the insurance company’s approach to claims, Gouws says.

“At Outsurance, we hardly ever repudiate a buildings claim because of underinsurance, and we don’t take a technical view on applying the average where a client is slightly underinsured. When you have your first claim and we see that your building is under-insured, we use that opportunity to properly advise you on the matter, in order to rectify your sum insured going forward.”

Anton Ossip, the chief executive officer of Discovery Insure, concedes that “of course, if you want to ensure you won’t have reduced payouts at claims stage, the best would be to have an assessment done by a professional. Having the incorrect sum insured in isolation will never lead to repudiation but can cause reduced payouts, and that is why it is important that clients insure their assets correctly. This underscores the critical role of a financial adviser to advise clients when purchasing short-term insurance (see ‘Who needs a broker?’, below).”

Through the mortgage provider

When your bank tells you that your home loan is conditional on approved buildings insurance being in place and it can arrange the cover and include the premium in your monthly mortgage bond repayment, it may seem like an offer you can’t refuse. In fact, there is no obligation to insure through your bank. The lender may insist your home is insured to a certain value to protect its investment, but, in terms of the National Credit Act, it may not compel borrowers to use any particular insurer. Both the Act and new Treating Customers Fairly protocols require banks to inform consumers of their right to arrange their own insurance.

In truth, however, most borrowers do insure through the banks. According to a spokesperson for Absa, about 80 percent of its freehold property borrowers (excluding loans on sectional titles and vacant land) elect to take the comprehensive insurance cover provided by Absa Insurance Company. Clients who choose not to must insure the property for the replacement value required by Absa, ensure that the property is covered for landslip and subsidence and then cede their homeowner’s policy to Absa for as long as the bond is required.

Replacement value, for Absa, is a desktop calculation based on the size of the building (square metres), the building materials, and the cost of labour; with the sale price and bond value playing no part. It is validated against “independent geographical data”, according to the bank’s spokesperson.

Absa’s website puts a slightly different slant on things, however: “Although your bank does send out an evaluator to the property, this valuation is only done to determine the asset value of the property and does not mean that the bank knows what the true replacement value is. When determining your replacement value, it is important to consider what it will cost to rebuild what you already have, to the same standards, in the same way and in the same place. You are responsible for ensuring that your property is covered for the correct and full replacement value.”

Ossip reinforces this: “The bank sends an evaluator to the property during the purchase process to determine if there is enough value to sell the house, should the bond applicant default on repayments. The amount that the bank requires the property to be insured for is, in most cases, based on the retail value of the property and not on the replacement value of the property. It is therefore crucial for the home-owner or bond applicant to ensure that the property is insured for the current replacement value (new for old) of all the fixtures and structures on the property.”

Standard Bank says the majority of customers opt for its own homeowner’s insurance, while Nedbank, which channels new customers to Nedbank Group Insurance brokers, puts the take-up at 72 percent. First National Bank (FNB) arranges buildings insurance for customers through Outsurance, which has a department dedicated to servicing FNB’s bond holders. All three told Personal Finance much the same thing: that the calculation of replacement value is done by qualified valuers who apply relevant cost and risk statistics to all the information about the property provided by the bank, from location and size, to the form and quality of construction.

Yet Standard Bank’s Homeowner’s Insurance Policy booklet, available on its website, places the liability for an accurate valuation firmly on the homeowner: “If the insured property’s replacement cost (at the time of the loss) is more than the sum insured, you are regarded as your own insurer for the difference. This means you must pay a proportionate share of the loss.” You have been warned.

When it comes to the quotation, you could be forgiven for wondering if the powerful bank on which you rely for your mortgage bond, which could play safe by overestimating the value of the buildings and which has a financial relationship with the insurance company, is likely to offer the best value for money. Anecdotal evidence suggests that it may not.

We have a very crowded and competitive short-term insurance industry in South Africa and many insurers are willing to negotiate and, in some cases, give preferential rates to customers who are willing to entrust them with all their short-term business. As just one example: Santam’s Bonus Option rewards you for insuring your home, your household contents and at least one car by giving you back 20 percent of the first year’s premiums if you remain claim-free for two years. So it makes sense to get an overview of prices and optional extras by speaking to a few companies, and/or consulting a broker.

If you arrange your own insurance, you will need to supply the bank with the policy details well before the bond is registered. If you opt for insurance linked to your home loan, remember it will not necessarily lapse when the mortgage bond is paid up or the house is sold and the loan account is closed. Many people have to pay extra premiums, because they did not realise it was up to them to terminate their insurance policies separately.

What matters to the insurers?

The insurers require very little information to produce a quote, although you will have to answer some rote questions if you deal with call centres. A 27-minute question-and-answer session with Santam’s call centre representative, at a Sharecall cost of R10.92, elicited exactly the same premium as a speedy online application via Durban-based insurance brokers (and Santam representatives) Kayser Baird, which asked only one question about the property: was there any thatch? Apart from that, I was asked for basic personal details, the address of the property, the amount of the insurance required and whether I’d made a claim in the past three years.

The comparison website Hippo will provide quotes from the insurers it represents based on the same personal information, but instead of the thatch question, it asks if you want the insurance to cover one or more geysers. A list of premiums comes back to you immediately, and you are offered a call back from one company of your choice for further information about the cover being offered, the excesses that would be imposed, and so on.

The call centres’ questions indicate that thatch is at the top of the list of hazards; even if your roof is slate or tile, all the call centres want to know if you have a “lapa”: a thatched construction that provides shade (possibly a particular hazard when positioned near a braai fire?). Also on the call centres’ radar are questions relating to the location and use of your home – for example: is it a commune or holiday home, do you use it for business, is it in a suburban setting with other properties around it, and is it occupied during the day, or left vacant for more than 60 days a year?

The characteristics of the building(s) seem to be less important. The number of bedrooms is required information, but it seems to have little relevance if you don’t ask how many rooms there are in total. Wall and roof construction are noted, but none of the call centres wanted to know the age of the property, whether there were fireplaces, whether gas was used and stored on the premises – or, in this era of load shedding, whether a generator was in use.

Why claims fail

Considering the risks – which may be small but are potentially devastating – the information seems scanty. Consequently, it is impossible to overstate the importance of reading and understanding the policy schedule and the terms and conditions of the cover, so that you have a grasp of the insurer’s priorities and intentions. Ask questions when in doubt and inform your insurer when circumstances change and when the condition of the property changes for better or worse.

The most common reason for claims being rejected, Absa says, is poor maintenance, resulting in damage that could have been avoided. When, for example, a wall collapses after years of being undermined by tree roots, rather than as a result of some catastrophic event, such as a flood, the claim is invalid.

Gouws seconds that, providing the second rule of homeowner’s insurance: “Insurance is there to protect you against sudden and unforeseen events, not against damage that occurs gradually over time.

“A leaking or rusted roof should not be left unattended, and a cracking wall should be addressed before it leads to further damage. Clients should also inform us if the risk exposure at their premises changes materially. For example, if you move out of your house and intend to leave it vacant, we will not insure you against theft of fixtures and fittings. Rather call us when circumstances change and we will be able to advise you on the steps that are necessary.

“It is best for all homeowners to understand that short-term insurance on a building is not a maintenance plan. It is therefore essential that the homeowner understands what events are covered and what are not by going through the covered perils with the financial adviser.”

Risks uncovered

We have had the list of what is covered by one policy; now for details of what is typically not covered, using Nedbank’s homeowner’s insurance policy as an example:

* Cracking or collapse (unless caused by an insured event, such as subsidence or landslip).

* Damage caused by roots and weeds.

* Costs of maintenance or reasonable measures that the policyholder should take to prevent loss or damage.

* Water damage caused by taps left open, malfunctioning appliances or overflowing baths.

* Soiling, scratching, tearing, denting or defacing of the buildings by the policyholder or pets.

* Damage caused by a rising water table.

* Damage by vermin, insects, mildew or rot.

* Consequential loss – other than rent, or costs

of alternative accommodation or loss of water as provided for in the policy.

* Damage to, collapse of, or overflowing of French drains and sewerage pits.

* Theft from buildings that have been left unoccupied for longer than 30 days, unless the insurer has been informed that they would be unoccupied.

* Theft of fixtures and fittings not accompanied by violent and forcible entry or exit.

* Confiscation or repossession of the property by any process of law.

* Damage caused by the felling of trees and the cost of removal of such trees.

* Wear and tear, gradual deterioration of buildings, or any pre-existing damage that is not sudden and unforeseen.

* Chipping of sanitary ware, wall or floor tiles or paving.

* Pollution, contamination or radioactive or nuclear material.

* Defects caused by sub-standard building material or design and/or workmanship.

* The use of the insured property for, or in connections with, the commission of any offence, whether with or without your knowledge. This includes any incident relating to obtaining, using or soliciting narcotics or any prohibited drug.

* Computer viruses.

When it comes to the risks associated with political acts or social disorder, the insurance companies outsource cover to the South African Special Risks Insurance Association (Sasria), a self-financing government body that provides cover for “special perils” as defined in the Reinsurance of Material Damages and Losses Act of 1989. These perils include:

* Any act directed to overthrow the government (local, provincial, national or tribal authority) by means of fear, violence or terrorism;

* Any act directed to bring about damage in order to achieve political, social or economic change, or in protest against any government or for the purpose of inspiring fear in the public;

* Any riot, strike or public disorder (including civil commotion, labour disturbance or lockout);

* Any attempt to perform any act mentioned above; and

* Any act by lawfully established authority in controlling or suppressing any occurrence referred to above.

The cost of Sasria cover is just a few rands a month, depending on the classes of business covered by your policy (for example, R9 if your policy covers buildings, contents and personal liability).

Paying the consequences

Some policies offer limited cover for various consequences of insured events; these are some of them, with the cover provided by iWyze in brackets:

* Renting accommodation in the event of the home being uninhabitable (25 percent of the sum insured);

* Loss of water (R1 000);

* Removal of fallen trees (R3 000);

* Tracing of leaks (R5 000), although not the repair of leaks, if they are a maintenance issue;

* Medical expenses of visitors who are injured in your home (R5 000);

* Medical expenses of domestic employees (R5 000); and

* Employment of security guards to protect the property after an insured event (R5 000).

Personal liability

Most policies cover the homeowner for personal liability in case another person is killed or injured on the property or has possessions lost, damage or stolen. It costs very little – for example, Santam charges R5, iWyze R6 – but could bring welcome relief if a claim is made against you. If you are held legally liable for a serious injury sustained by a visitor or domestic worker, for example, Santam and iWyze have a limit of compensation of R5 million.

Every policy is different, but if you opt for Santam, for the same R5, you will be able to claim up to R5 000 for legal costs if you are wrongfully arrested and up to R5 000 for the costs that might result from theft of credit and debit cards and SIM cards. If you run the risk of hitting a hole-in-one in golf, or bowling a full house, you’ll be glad to know that Santam takes seriously your obligation to buy a round in the clubhouse and will compensate you to the value of R2 000.

And there’s more …

Several companies offer very attractive additional benefits in an effort to distinguish themselves from the rest. These are just some examples:

* No excess. If you are over the age of 55, you can insure your home excess-free through Alexander Forbes, which offers the Forbes 55 Plus policy, and Santam, which automatically waives excess payments for existing and new customers who are over 55. iWyze does not impose excesses on retired policyholders and waives the excess on your first claim under your homeowner’s policy whatever your age or employment status if you remain claim-free for three years. Discovery Insure imposes no excess on claims related to fire, lightning, explosion, snow, flood, storm, rain, hail, earthquake or malicious damage.

Excesses vary from company to company – from none, as above, to a percentage of the claim, such as 15 percent in the case of Budget Insurance. So it is important to do your homework and to make sure you have an emergency fund to cover the excess, should you have a claim.

* No-claim rewards. The no-claim benefit attached to Santam’s Bonus Option has been touched on elsewhere. iWyze refunds 10 percent of your premiums in cash if you don’t claim for certain periods, starting with the first three years of the policy. If you insure your home, your household contents and at least one vehicle with iWyze, you are eligible for a 100-percent refund of your buildings insurance premium if you do not have a buildings claim for six years. Outsurance gives you 10 percent of your premiums back in cash after three claim-free years.

* Help in emergencies. Not surprisingly, it is the large companies that can offer free 24-hour emergency assistance. These are the best deals we could find:

– Momentum offers the Momentum Assist programme to every client, regardless of the kind of insurance you have, so you can call for help from home, the office or on the road, whether the help you need is mechanical, medical or legal;

– Santam’s six SOS services cover home assistance, road assistance, medical assistance and legal advice, plus you can request a drive home for you and your car if you have had too much to drink (limited to six times a year) and ask for help finding your way to your destination if you get lost;

– Outsurance provides 24-hour emergency home and roadside assistance; and

– iWyze’s iAlert programme provides home emergency assistance to clients with homeowner’s policies.

When it comes to your home, you can never have enough protection, and there may be times when you don’t see eye to eye with the insurance company on whether loss or damage should be covered. Want to protect your expensive garden from impact by a falling object? It can be done. But then your leaking pipes might not be covered if there is evidence of wear and tear. Insurance is a compromise, but, fortunately, in the case of homeowner’s policies, it is relatively inexpensive and the benefits in the worst-case scenario are potentially enormous.

ROUTES TO REPLACEMENT VALUE

If you don’t want to gamble with your financial future, you need to know what it would cost to replace your home on a new-for-old basis. Hopefully, you will never need to claim in full, but if you underestimate that cost and insure for less, you could have all your claims cut down proportionally.

You have three options: you can obtain a professional valuation, you can ask a reputable building contractor to provide you with an assessment, or you can use the basic calculation tools available from some of the insurance companies.

Professional valuation services:

* NID (National Inventory Data): www.nid.co.za

* Qantum Risk Assessment (registered with the Financial Services Board as an authorised financial services provider): www.qantum.co.za

Calculators:

* Outsurance: www.outsurance.co.za > scroll down to the bottom of the page and click on “Building insurance” > click on “Buildings calculator”

* Discovery: A calculator is available to clients. Email [email protected]

* Santam: www.santam.co.za > click on “Home” > scroll down the page and click on “Building calculator”

WHO NEEDS A BROKER?

The rise of call centres and the fierce competition that has developed among insurers to encourage consumers to call direct has created a perception that brokers are superfluous – that it is smarter and more cost-effective to cut out the middleman. In fact, it certainly does not cost more to use a broker, in terms of time or money.

A broker who is independent and an authorised financial services provider in terms of the Financial Advisory and Intermediary Services Act can give you access to multiple insurers – and you only have to answer questions once.

The insurance company you choose will pay the broker’s commission and the prospect of a continuing relationship between you and your broker ensures that the advice you receive will be tailored to your specific needs. And brokers are better at interpreting cryptic clauses and cross-checking the details in policy documents.

As Anton Ossip, the chief executive officer of Discovery Insure, puts it: “After the right insurance amount is chosen, the next most important thing is that the client understands the terms and conditions of the contract – specifically what perils are covered, what is not covered, and what conditions need to be met. For example, buildings need to be built in compliance with National Building Regulations.

“The best advice is to have a financial adviser who can explain these terms and conditions to the client and assist when the client has a claim.”

Personalised service is especially valuable when you consider the complexity and variety of homeowner’s insurance, which is relatively cheap to buy, but may be an enormously expensive mistake if you get it wrong.