The value of homeowner's insurance

NUTAN RAGOOBIR, insurance consultant

Being an informed consumer means properly understanding the nature of the product or service that is being purchased. Homeowner insurance is no different.Your homeowner’s insurance policy should be clearly understood, with any ambiguities clarified by a qualified insurance professional. Following the recent national flooding disaster in TT, many concerns have arisen about homeowner’s insurance. Here are some common concerns:

Compliance

In order to transact a homeowner's insurance policy, the following documents are often necessary:

1) One or two forms of ID per insured

2) Proof of address (not older than six months)

According to the insurer's discretion, the following documents may be required, sometimes:

1) Proof of ownership of property

2) Recent valuation report on property

3) Inventory of contents

Land ownership

Questions have also been raised about land ownership. In TT, there are many cases where citizens do not own the land on which their property is built. In such cases it is imperative to prove insurable interest of the asset at the time of loss.

Insurable interest simply means that one would suffer a financial loss should the asset be damaged. A lease stating the right to live and build on the land is often useful along with recent utility bills, when proving insurable interest.

In TT, there are also many cases where homes are built without approval of Town and Country. Although Town and Country approval is not necessary for homeowner's insurance, an insurer may still choose to utilise discretion in some cases.

For those who are renting, while the landlord may have property insurance to protect his building, contents insurance is extremely important to protect your belongings.

Deductible

Most homeowner's insurance policies in TT carry a deductible or excess, a word that causes much frustration in many of our minds.

It is simply the amount that the policyholder bears in the event of a loss. These deductibles, however, vary. The standard excess for natural disasters under a typical homeowner's insurance policy stand at two per cent of the sum insured of the property.

For example, if the insurable value of your home is $1 million, the excess for any natural disaster will therefore be $20,000. So if your loss after an earthquake is assessed to be $500,000 then you will be eligible for a settlement of $480,000.

Flooding, however, is a bit different. Here the excess can either be a fixed amount or a fixed percentage of the sum insured, depending on your policy. For flood excess to apply, the flooding cannot be due to any natural disaster.

For example, if there is flooding in your home due to a hurricane, then the standard excess of two per cent of the sum insured will apply. However, if there is flooding due to torrential rainfall, then the flood excess will apply.

Let us assume that a loss of $500,000 was assessed after the flooding situation that recently occurred in Sangre Grande and a flood excess of $500 applies, one would therefore be eligible for a settlement of $499,500.

An excess or deductible is important as it often acts as a risk control measure, helping insurers to properly underwrite a policy.

Average Provision

After the settlement of a claim, it is sometimes heard that the policyholder would not have received the expected settlement. This is often due to the "average provision" in a property insurance policy that enables the insurer to pro rate (assess) the value of a claim, where the sum insured under the contract is found to be less than the insurable value of the property, ie the property is under insured.

To determine the pro-rated value of the claim, the following formula is used:

C x (S/I), where C is the value of the claim;

S is the sum insured at the time of inception of the policy;

I is the insurable value at the time of inception of the policy.

For example, if your home is insured for $1 million but the insurable value is found to be $2 million, then it will be underinsured. If a loss of $0.5 million is assessed, then the claim will be calculated as follows:

0.5 x (1/2) = $0.25 million.

To determine the insurable value of one's property, a valuation is most important. Going forward, the Insurance Act 2018 will mandate the insurance industry to clearly inform the client of the average provision before entering into any contract. This therefore serves to avoid misunderstandings at the time of loss.