Protecting Your Property

This week we are looking at the role of insurance in maintaining property values.

The purpose of insurance is to provide a level of protection against foreseeable losses. A prudent investor would have their property properly insured in order to limit the extent of losses in the event of damage. The central principle being that, in the event of a loss, a good insurance policy would bring the policyholder back to their original position—as if no loss had occurred.

Mortgage lenders insist that borrowers have building insurance to cover the loss of their funds since these are secured by the property. This is necessary and valuable since funds would be available to ensure that the core asset can be replaced in the event of its loss. However, as we will see later, there are other aspects which these policies can overlook.

Another point is that some property owners take the decision to let their insurance lapse once the mortgage has been repaid and while this course of action can reduce the costs of holding a property, it is risky. Others may simply not keep their policies up-to-date and this can also give rise to similar risks. There is a strategic decision to self-insure which some large or wealthy property owners can take. In that case the owner is opting to reduce holding costs by saving the insurance premiums on the assumption that, in the unlikely event of a loss, there would be sufficient liquid assets to pay for the restoration.

We have heard recent expert estimates that over 60 per cent of the properties in this country are uninsured and further, that about 30 per cent of the insured properties are inadequately covered. When we consider the hurricane losses recently experienced by our Caribbean neighbours and the probability of our property owners suffering in a similar vein, as outlined in last week’s column, it is clear that this is an important aspect for us to consider.

Next week we consider the lessons we can learn from the Queen’s Park Savannah.

Some key points to bear in mind when considering insurance for your property:

Basis of cover

Reinstatement and replacement are two terms which are sometimes used interchangeably to describe the basis of cover.

In the event of a total loss, reinstatement cover would entitle the policyholder to recover the cost of providing a new building having the same size and facilities with today’s techniques and materials. Replacement cover would entitle the policyholder to recover the cost of providing a new building having the same size and facilities with identical techniques and materials.

The difference is only really substantial in the case of older buildings with materials not currently in vogue, for example, churches and schools.

The insurable risks

Your property insurance policy should cover risks well beyond the conventional peril of fire.

These would include storm, flood, earthquake, civil commotion or riot, soil movement or subsidence. It is important to ensure that the policy has realistic terms and these are covered in the section on insurance brokers.

Extent of cover

The insurance policy should extend beyond the cost of the building to include the site improvements. These are the items outside the building which enhance its utility, security and amenity; ultimately they add value. Some of these would be the drains, fences, external lighting, security systems, terraces, steps, garden, pool and, of course, retaining walls.

In the case of apartment or townhouse type properties there would be a significant cost to restoring the common facilities such as carparks, driveways, lights and drains. If you live in one of these complexes you should ensure that the cover extends to these items.

The insurable losses

The losses to be covered should include more than just the cost of constructing the new building and the essential site improvements.

Other items to be covered should include site clearance, the cost of professional fees for designing the new building and the cost for rental of suitable alternative accommodation until rebuilding is complete.

Insurance brokers

Some mortgage lenders have arrangements with particular insurance providers to offer discounted cover to their borrowers and these can be a convenient and economical way of insuring your property. The better course might be to use the services of an insurance brokers to determine the best policy to cover your risks. Insurance brokers are independent professionals who offer to obtain the best cover for clients.

The broker’s commissions are paid out of the insurance premium and, in some cases, the results can be better than you might obtain from an insurance salesman.

Level of cover

In addition to the aspects outlined above, the policy would also have to offer an adequate level of cover. If the level of cover is inadequate, it would be necessary to find extra money to put oneself in the original position.

In light of the rapidly increasing cost of construction materials it would be prudent for property owners to consider increasing their levels of cover.