Market value and replacement value are two different things, as anyone will find out when they go to claim for home insurance. To ensure your home is adequately insured run a check.
Anne Porter, head of Knight Frank Residential SA, says all too often homeowners will find out, only after disaster has struck, that the cover they have is inadequate and they will probably have to fund large sums of money in order to fully replace what is lost. Whether fire or flood, all homeowners should be able to rest easy that they can claim the amount needed from their insurance company to replace the home in its entirety.
If a property still has a bond over it, the bank will insist on homeowners’ insurance cover and will usually recommend the owner take the bank’s preferred insurance service provider’s policy. This is not uncommon as they will have negotiated contracts with these service providers based on their performance and ability to pay out on claims, Porter points out.
However, if the home has been paid off fully or was bought with cash, it is up to the homeowner to protect his investment as best he can, she says.
“Too many people make the mistake of assuming that their policies cover every type of damage to the property. Although the majority of events are covered, there are some events in certain areas that might need separate endorsements,” says Porter.
The amount insured is often also mistakenly calculated as the market value and not the replacement value. The full replacement value will include professional fees and building contractors fees (if a complete rebuild is necessary) as well as materials at their current buying cost, which can be considerably higher than what it might cost to buy the equivalent second hand home in the neighbourhood (which is how many would establish the market value).
Some also forget to amend their policies after renovations have been undertaken, and if this is omitted those renovations will not be covered. Items such as upgraded bathrooms or kitchens are often the most common renovations done to a home. These will add considerably to the value but might not have been added to the amount insured.
An important point to bear in mind is that the price of the property will generally increase year by year, and the coverage levels might not increase in line with those values. It is better to get a professional valuation done from time to time than to rely on a set percentage increase calculated by the insurance company each year.
“The main reason to insure a property adequately is peace of mind in case of an event where the home has to be replaced. Times such as these are already extremely stressful for the family, and you don’t want to add to the burden by not covering yourself properly from day one,” says Porter.