Home Sweet Home
(article published in Canarian Weekly 7th August 2009)
Author: Susana Dias
So you purchased a house. Congratulations! Buying a home is a big step in anyone's life and a great investment. Now it's time to protect your investment by purchasing home owner insurance. But... what happens if, despite having assessed and managed the risks properly, an unpredictable event, such as a natural catastrophe or a Mount Teide eruption takes place? Insurance pro Susana Dias clears up any doubts...
Home insurance is an insurance policy that covers your house, the garage, other related structures, and also personal possessions inside the home against damages caused by everything from fire to natural disasters and even theft. It is very important that your building or for that matter, any property is adequately insured. The sum insured is the maximum amount that an insurer will pay the policyholder in the event of any loss.
But a common mistake people make is that they believe that the sum insured must be the present market value of the property which is actually not the case. In fact it should be the rebuilding cost amount that is guaranteed if any loss occurs to the property. To ensure that your risk is fully covered, the rebuilding cost must be calculated by a professional surveyor. However, some insurance companies calculate the sum insured based on some pre-decided factors such as age, type of house, condition and building quality.
The rebuilding costs will increase annually based on the index value of that year, the basic requirement is that the cost for the first year is calculated correctly. For you to have a rough idea, use the following formula: depending on the quality of the building, multiply the constructed area by 800€ (for average), 1000€ (for good), 1.500€ (for very good). Once you know how much the reconstruction value is, insure your home for that amount. We estimate that 60% of insured houses in Tenerife have the building over insured, and that’s mainly because people tend to use the market value of the property instead of the reconstruction value. Remember that the market value is affected by several factors, such as proximity to the sea, cost of the plot, etc… these factors are not important to evaluate the reconstruction value of your house: it is therefore the same value to reconstruct a 100 sqm house in Bahia del Duque as it is in Valle San Lorenzo.
Another thing is if you borrowed money in the form of a mortgage loan: the mortgage lender always requires that the buyer purchase homeowners insurance as a condition of the loan, in order to protect the bank if the home were to be destroyed. In some cases the mortgagee will waive the need for the mortgagor to carry homeowner's insurance if the value of the land exceeds the amount of the mortgage balance. In a case like this even the total destruction of any buildings would not affect the ability of the lender to be able to foreclose and recover the full amount of the loan.
Most insurers charge a lower premium if it appears less likely the home will be damaged or destroyed: for example, if the house is equipped with fire sprinklers, fire alarms or has an alarm system hard wired to a central call center. A stitch in time saves nine Following a major fire or burglary, one of the requirements in a homeowner’s policy is to create an inventory of what was lost or destroyed, including if possible any receipts. Does that sound like a nightmare to you? It Is! Even harder than documenting what you had is remembering what you had! Imagine coming home from a hard day at the office and finding either charred remains of what was once your dream house or finding your front door broken and your home torn apart by a burglar.
The emotional trauma is bad enough, but in addition, you have to remember what’s missing, because you only get paid for what you can remember. One of the answers is to fill out a household inventory booklet prior to any loss, listing descriptions and values for every piece of personal property you own in every room of the house… and yes you must include everything: from decoration, to clothes, furniture, lamps, mirrors, electro domestics… etc! In most of the cases you will probably find out that the contents amount declared in your policy is several thousand euros lower than reality! Take the inventory to your insurance agency and match the value of what you’ve got with the contents value in your policy. You might be surprised to find out that by insuring your contents for an extra €5,000, your annual premium will probably only increase by 3 or 5 euros … and if something happens, you won’t be losing out!
A far simpler strategy for handling this documentation is a video or a photographic inventory. This approach is easy, fast (you can film the whole house in a hour or two) and even fun – especially when you add verbal description: “This vase here that looks like a garage sale reject is really an antique and worth 3.000€“. I particularly like the video strategy because everything you own can be on one tape or dvd. It’s easily stored and, best of all, you can easily add to it when you acquire new things. If you don’t own a video you can easily rent or borrow one. An extra benefit of having filmed documentation at claim time is a reduced need for receipts: most adjusters will waive that requirement if they can see the item in your home prior to the loss, in some kind of photographic format. All in all, the video strategy is superior in every way to the written inventory strategy.
Of course, if the house burns down, so will all your records, so be sure to store the photos or videos safely off-premises (for example, in a safe-deposit box at your bank). Nevertheless remember you will only get what you paid for: if you have 20.000€ euros of contents insured in your policy but then after an incident you claim 30.000€ euros, the Insurance company will never pay you the full amount of what you claimed. In fact, probably you won´t even receive the declared 20.000€ because you are under insured. Under-insurance occurs when the amount for which the property or contents is insured, is less than the value of such property in reality. Underinsurance of home building and contents is a huge problem, the danger is your insurer may only pay you on a pro rata basis, which means the payout to you may be a lot less than the items are actually worth.
The problem with someone being underinsured is that nobody wins. The policyholder loses because in the event of a major disaster, such as a fire when you have to replace your home building and contents, quite simply you will not have enough money to buy what you had previously. Insurance companies also lose because firstly they are not collecting the premium they should be to cover the risk involved. Secondly when someone makes a claim, they come off badly in the eyes of their policyholders when they then have to tell their clients that there is not enough cover to enable them to replace all their home contents, usually resulting in a very unhappy customer which often can be a PR disaster!!! So correct insurance cover gives you a win-win situation!!! As the policyholder, when you are correctly insured you win because you get the peace of mind knowing that if something happens you will get fully compensated for all your home and contents´ assets.The insurance company also wins because by collecting the necessary premium revenue to enable them to fully compensate policyholders in the event of a claim.
And If Mount Teide erupts? Read carefully the covers of your home policy…. Your heart will probably start to beat very fast when you read that earthquakes, natural catastrophes or even a volcanic eruption are not covered in your policy! Read again… probably you will find that although the Insurance Company excludes “acts of God” , these extraordinary risks are covered by the Consorcio de Compensación de Seguros, which is something unique throughout Europe. The Consorcio is a public entity, whose origins lay in the Spanish Civil War. The Consorcio is closely linked to the cover of extraordinary risks, it being the core tool of a unique disaster claim compensation system. The Consorcio acts in effect as a catastrophe insurer for certain types of insurance and perils in respect of Spanish risks, compensating losses and injuries arising from extraordinary events taking place in Spain and affecting risks located in Spain. It also covers personal damage for extraordinary events taking place abroad if the insured resides habitually in Spain. However, the Consorcio’s cover will only apply if you are taking your policy with an Insurance Company that cooperates with Consorcio: Liberty, Axa, Zurich... etc. Unfortunately same well known English Insurance Companies are operating in Spain without cooperating with the Consorcio... this means that in the case of a serious catastrophe (like the Delta Storm in 2001), you won’t be covered... so remember this important detail when youre calling around for quotes! A home is the largest asset most people possess.
Insuring it is not a frill. It is a necessity.