Don’t skimp on your HOC – it’s really not worth the risk
Floods, fires, hail, high winds… the past few months has repeatedly shown just how suddenly and rapidly properties can be destroyed by natural disasters – and leave uninsured or under-insured owners exposed to huge financial loss, on top of the devastating loss of their homes and possessions.
“These tragic situations underline the necessity of taking it upon yourself to check regularly that your home is insured at full replacement cost, and for all eventualities,” says Gerhard Kotzé, MD of the RealNet estate agency group.
“Most homeowners who have a bond also have home owners’ insurance (HOC) through their bank, but they should not just assume that when the bank adjusts the premium from time to time, this change will necessarily mean that they are fully covered.”
Full coverage, he notes, should not exclude any sort of disaster, including earthquakes and ground subsidence, and full replacement value should include the cost of any demolition that may be necessary as well as architect and town planning fees, for example, as well as the actual cost of rebuilding the structure at current construction rates.
“If this amount has not been correctly calculated, and you are thus under-insured in the event of a catastrophe such as a flood or a fire that razes your home to the ground, your insurance policy will not pay out enough to replace it as it was. And if the structure suffers partial damage, your policy will also only pay out a pro-rata amount - in other words, if you are 30% under-insured, the insurer will only pay out 70% of whatever claim you make.”
Kotzé also says that to work out the replacement value of your home, you should not rely on the valuation estimation software that is often used by both bank and non-bank insurers – because the person punching in the information could be trying to keep the premium down in order to sell you the policy.
“And basing replacement value on current market value is also a dicey move – construction costs are rising all the time and the price of rebuilding your home can be significantly higher than the price for which you could sell it.
“A better option is to consult a home builder and ask him to work out how much it would cost - at current prices – to clear the site and design and build your home from scratch. Then adjust your policy without delay if there are discrepancies between your existing cover and the builder’s estimate. Your premium may go up, but you will have peace of mind knowing that you would be able to rebuild should disaster strike.”
In addition, he says, you should check to see if your HOC policy provides any cover for “loss of use”, in the quite likely event that you have to rent a home in the same area while your own is being rebuilt. “If it does not, you should adjust your policy or consider getting a new one that will cover your rent and related living expenses for at least 24 months.
“And finally, you should not forget about the contents of your home such as clothes and furniture, not to mention any precious items that you could lose in a disaster. These also need to be insured for their replacement value, not their cost at the time of loss, so you should also double-check your short-term policy to make sure that is the case.”