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Why it is wrong to insure the market value of your house

An underinsured client

Recently, one of our customers requested an assessment to determine the value of his Ballito residence for the purpose of updating his insurance policy.

Upon visiting the site, we observed an upper middle-class house with standard finishes and the Indian Ocean in full view from the living room and balcony.  Following a physical inspection of the building, we assessed its insurance value to be approximately R4 300 000 excluding the moveable contents.

Upon receiving our detailed valuation report, the customer demanded a full refund as he believed our valuation to be far too low. He bought the property four years prior for just over R7 million and was currently insured for R9 million. He had expected our valuation to be even higher.

Our valuation left him worried that he would be grossly underinsured if he applied our recommended sum insured.

Our advice

The location of his property is highly desirable and the land value alone constitutes a substantial portion of the market value. However, a house of identical design and finishes in a middle-class neighbourhood without the scenic view would hardly yield half the market value.

Therefore, while the view and location increased the market value – the value the home will sell for on the open market – the insured value only needs to reflect the cost to rebuild the house as it stands currently.

In the event of total destruction, it will cost approximately R 4 300 000 to reconstruct the house to the same specifications including demolition costs, rubble removal and professional fees. At a sum insured of R9 million, the customer was over-insured by 110%. This means he could have saved a substantial amount in premiums, had he been insured for true replacement cost over the past four years instead of for market value.

We find that many property owners are over-insured – often by 50% or more - due to being unaware that they need to obtain insurance cover for their home’s replacement cost and not the market value.

Read: Market value and replacement cost - not the same thing!

 

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