Home Insurance

This week we will look at home insurance.?We have seen the devastation being experienced recently in Florida with Hurricane Ian and in other countries including Germany, Belgium and India as the impact of climate change and the melting polar ice caps have brought devastating floods which have taken hundreds of lives and destroyed entire towns and villages.?We have been fortunate not to experience this level of devastation and loss of life.?However, we need to be prepared with a well-designed insurance policy to help alleviate some of the pain if affected by events outside of our control.

Your homeowner’s insurance should cover the cost of repairing or rebuilding your house if it is damaged by fire, a storm, or a flood.?Standard policies cover the house and its general contents.?The Association of Trinidad & Tobago Insurance Companies’ (ATTIC) notes that "General Contents" are all your household possessions, e.g., electrical appliances, furniture and fittings, your clothes and food stuff.?"Special Contents" are high risk items, e.g., electronic or digital equipment, cameras, jewelry or heirlooms, which need to be listed and insured separately.

ATTIC also notes that the following perils are usually covered in standard contents and building policies: fire, lightning, explosion; bursting and overflowing pipes and water tanks; burglary/housebreaking; damage by aircraft; impact by road vehicles; strikes, riots, malicious damage; hurricanes, windstorms; floods; and damage caused by falling trees.

Cash Value vs. Replacement Cost

It is important that you know and understand the difference between replacement cost and actual cash value.?Make sure that your personal property insurance covers the replacement cost of your belongings, not their actual cash value.?AN ACTUAL CASH VALUE POLICY will reimburse you for the cost of your possessions after deducting depreciation.?While A REPLACEMENT COST POLICY will reimburse you for the actual cost of replacing the lost or damaged items.

ATTIC uses the following example on its website:?If your contents are covered by an ‘actual cash value’ policy and your 7-year-old TV, which cost $1,000 and may have depreciated 50%, was damaged in a flood, you would only be paid only $500 for that set when a new TV with similar features and dimensions would cost $2,000.?However, if you had a replacement cost policy you would be compensated $2,000—today's cost for a TV with features like the 7-year-old set.?Note that an appraiser would determine the value of the affected property.

Unfortunately, most insured people affected by disasters usually find it very difficult to know or prove all the items that were lost.?My advice is to set aside some time NOW to list all your furniture, electronic equipment, other major household items and possessions.?DON’T WAIT!!?

Where possible list the serial number, date and cost when purchased, and include the receipt if you can.?ATTIC also advises that you take photos or videos of your home and its contents.?Using a video also lets you record information about the items and their date and cost of purchase.?Whether your record is on film, video or paper, make a copy and ask a friend or family member to keep it or store your copy in a safe deposit box or electronically in the cloud so the inventory record will be safe at another location.?

Homeowner’s Insurance

When disaster strikes you want your insurance company to make you whole.?You want to be able to replace the items lost in a flood or fire, or to rebuild your house and you also want to be reimbursed for the cost of alternative accommodation while you rebuild or restore your property to its pre-loss condition.

Your insurance policy is basically an agreement between you and your insurance company.?You agree to pay a premium and they in turn agree to make you whole, to reinstate your property when disaster strikes.?However, there are rules and conditions.?In a recent interview Gary Keller, author of The One Thing noted that he preferred to think of agreements as disagreements because the only time you’re going to read them is when you disagree.?I want you to think of your insurance policy as a disagreement and take the time now to read and understand it carefully since many disputes can arise on amounts payable on insurance claims.?

Here are some of the important things to be aware of with respect to property insurance.

Under Insurance

If your house is still mortgaged to your bank, credit union of other financial institution, home insurance is mandatory.?The problem, however, is that the property may be under insured, and your basis of settlement will be different if you suffer a total loss versus a partial loss.?Most insurance policies specify that if the sum insured is less than 85% of the cost of reinstatement for a total loss, then the insured will be responsible for a proportion of the assessed loss and for their excess.?I know you are asking what this means in plain English.?ATTIC, on their website provides a very good example which I have used below.

Say the actual reinstatement value of your property is $1,250,000.?We will assume that this is the cost of rebuilding if the entire property was destroyed by fire or a hurricane.?The sum insured (given by owner) is only $500,000, 40% of what it would cost to rebuild if there was a total loss.?If there was fire damage to the property of $500,000, i.e., a partial loss, the amount payable by the insurance company would only be $200,000, 40% of the damage.?The insured, the owner of the property, would therefore have to find $300,000 to rebuild or repair.

In the event of a total loss in the above example, where the loss is $1,250,000, the sum insured of $500,000 is payable, leaving the insured to find the difference of $750,000 to replace their home with a building of a similar standard.

I am sure that you will agree with me that you do not want to find yourself in this situation.?Unfortunately, as economic conditions worsen, many individuals may under insure to ‘save’ money or reduce expenses.?This is a short-sighted and dangerous practice, which should be avoided since it may cost you dearly in the long run.?Therefore, if you’re considering going without home insurance to save money, consider whether you could afford to replace your home if it were destroyed or your belongings if they were stolen. Instead of cancelling, consider your other options and see if you can find cheaper home insurance that provides appropriate cover for your situation.

New for Old

When it comes to the replacement of any lost, stolen or destroyed items, ensuring that you have “new for old” cover can be the difference between receiving a replacement item or receiving a small sum of money to put towards replacement. ?New for old cover means that if your belongings are stolen or damaged beyond repair, your insurer will provide you with a new equivalent item, regardless of the age of your original item.?The key word to note is an “equivalent” item.?If your 20-year-old box television was destroyed in the recent floods it will not be replaced with a large 3D flat screen.?It will, however, be replaced with a new television that most closely approximates the specifications of your original one.

If you’re not going to get a new flat screen for an old box top, why the importance of new for old cover? ?One word: DEPRECIATION.?If you sold your possessions, the price you would get for them in a garage sale, the market price, would not give you enough money to replace them.?New for old replacement will help you refurnish your home with new contents rather than second-hand goods.

Cheers, Nigel

Nigel Romano, Partner, Moore Trinidad & Tobago, Chartered Accountants