The fires in Knysna earlier this year caused damage estimated at R4 billion, gutted 600 homes and displaced more than 10 000 people. They also taught some people some hard lessons about managing risk.
This is according to Mandy Barrett, the marketing and sales manager for personal product solutions at insurance advisory firm Aon South Africa. Barrett says homeowners should obtain professional advice and review and update their insurance cover at least once a year.
“It was reported that more than half of the formal homes affected by the Knysna fires were not insured. In some instances, properties were under-insured for the replacement cost of the buildings and assets at today’s prices.”
Barrett says some homeowners who had settled their mortgage bonds had neglected to reinstate their buildings insurance after closing their bond accounts.
“It is heart-wrenching to hear reports that some people affected by the Knysna fires have been left compromised with inadequate or no insurance cover. It points to the need to have a strong relationship with your insurance broker, to meet to review your needs at least every year, as well as follow the advice given when it comes to insuring your most significant financial investment: your home and everything in it.
“Most of all, it highlights the folly in assuming that worst-case scenarios are simply too unlikely to happen,” she says.
Barrett says adequate insurance requires a thorough needs analysis and the insights of a qualified broker, who can establish the replacement value of your assets, and ensure that risk is mitigated and that the right cover is in place.
She says a qualified broker should be adept at interrogating policy terms and conditions and any exclusions.
Insurance is often regarded as a grudge purchase, which is one of the reasons many people fail to pay attention to what can be a lifeline in a crisis, she says.
“What many don’t consider in their insurance planning is that all progress is subject to having today’s assets and achievements secured, so that you can continue to build on them and grow.
“One of the most important lessons to come out this experience is the need to put proactive measures in place to manage your risk and exposure, to keep your insurance cover current and affordable, and to engage the support and advice of a professional broker whose sole focus is the protection of your interests. If you are uncertain about any terms and conditions of your policy, speak to your broker.”
Advice for homeowners
She says some of the key lessons from the Knysna fires for homeowners are:
• Correctly insure your single biggest investment: your home.
• Mortgage bond insurance is not sufficient. This insurance, which is compulsory when you take out a home loan, may not be sufficient if it is not does not cover the full replacement value of your property but increases simply in line with the inflation rate.
• Reinstate your cover. Once you have paid off your mortgage bond and closed the account to which your insurance policy was linked, make sure you take out new comprehensive insurance for the replacement value of the building.
• Always insure at replacement value. Market value 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 building prices. When it comes to insuring at replacement value, if your home was completely gutted, would you want to reinstate your home as it was, or would you be willing to accept something less? Remember, too, that if your home is gutted, rebuilding is not the only cost for which you will be liable. You will also have to pay for demolition, rubble removal and drafting architectural plans.
• Do not assume that the worst cannot happen. Many people believe that a catastrophic event such as a fire or flood won’t happen to them and so neglect to insure their property properly.
• Keep your policy up to date. Alterations or improvements add to the value of your home. Check that your cover takes the additional value into account.
• Household contents insurance. Make sure that all your movable assets are covered. Santam research has shown that about 40% of consumers are under-insured against major losses. Insure the contents of your entire house, not only what you think may be lost or stolen.
• Do not under-insure. If you are under-insured, you will receive a partial payout when you claim, because the insurer will apply what is known as the principle of average. For example, if you insure your household contents for R250 000, but their replacement value is, in fact, R500 000, you are 50% under-insured. If you suffer a loss of R100 000, the assessor will apply average to your claim, and you will be paid only 50% of the claim, or R50 000. This example highlights the importance of accurately valuing your contents and having the correct amount of cover.
• Manage your risk. Insurance companies are not intent on avoiding settling claims. But it is important that you understand the terms of your insurance policy, which is a contract between you and your insurer, and play your role in managing your risk.