Struck by floods? Ways to stay afloat

A good home insurance can safeguard your property from financial loss

Swiss Re recently released its report on catastrophes in 2017. The losses at an all-time high of $330 billion were well above the 10-year average of $190 billion. What stood out, once again, was the low level of insurance in India.

Three flood-related disasters in India showed up in the list of 10 worst catastrophes in the world in terms of victims — close to 900 were killed.

However, not one Indian calamity featured in the list of top 10 insured losses. Floods damage homes and insured losses in India are so low because few buy home insurance.

A home insurance policy safeguards you from financial loss when your home or its contents are damaged. Here is a primer to buying good home insurance.

What’s covered

Home insurance typically covers losses due to fire, earthquake, storm, flooding, burglary, theft and malicious damage. Losses in the structure of your home or contents are paid for. For example, if a hailstorm results in shattered glass or an earthquake cracks your walls, then, that will be compensated. Similarly, even a theft will be covered.

To strengthen your home insurance policy, additional covers can be bought for an extra premium. For example, loss of rent.

Here, if a rented property is destroyed due to some peril and the tenant leaves, the rent lost until repairs are completed can be insured. Another add-on cover is temporary resettlement where rental for alternative accommodation can be provided until repairs are completed.

What’s not covered

Standard exclusions are deliberate destruction of property, damage to property due to wear and tear, war, or when it is unoccupied for more than a certain specified period, loss of cash, antiques or collectibles.

So, water pipes wearing out through use or the door chipping over time will not be insured.

Determining sum insured

This first step is where the most mistakes are made. When calculating the sum insured, people often include the land value. This unnecessarily inflates the premium because insurance will only pay for the construction cost.

Over the past few years, select insurers have been offering home insurance on an agreed value basis, including the cost of land. This is useful if you live in an apartment and there is a possibility of your flat becoming unliveable to the extent that you have to buy another house. The insurance, on agreed value basis, will cover the cost of purchasing your new home, if the insured house is completely destroyed or unrepairable.

Insurers calculate the sum insured based on market or reinstatement value. In market value, the construction cost at the time the insurance is purchased is taken as a base and the construction value reduces each year through depreciation. This means that the claim paid will most likely be less than the reconstruction cost. In the reinstatement value method, when a claim is made, the current value of reconstruction is paid. For home insurance, always insist on reinstatement value as the basis for setting the sum assured. Home owners sometimes under-insure the property to reduce premium.

However, what they do not realise is that this will also reduce the claims paid.

Why claims get rejected

An incorrect description of the home is the most common reason for claim rejection. Specifically, the address must be correct; it should be properly classified as residential or commercial, and the insurer should know if the home will be vacant. The house should not be under construction. If you are modifying the structure, keep the insurer informed.

Home insurance may also require some warranties to be met like a fire extinguisher, a guard or an annual maintenance contract (AMC) for electronic equipment. Clarify these before buying the insurance.

Home insurance is a cost-effective way of protecting your most valuable asset. Insuring a 2,000 sq ft home should cost you ₹8,000-10,000 a year.

The writer is Managing Director, www.securenow.in

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