IT IS FAIR to say that most people take out insurance to cover their building, which usually covers various events, mainly fire, earthquake, burst pipes, flooding, acts of God etc, etc. One cannot be too sure where the cause of damage will come from, so a building should be covered for all eventualities, even if this means a slightly higher insurance cost. Special care is needed, however, when signing an insurance policy for so called exclusion clauses. One such exclusion clause is that if a building is damaged as a result of a bush fire, there is no cover (unless you so stipulate). Other clauses, which are of a special interest to foreign buyers, include that if a building is not occupied for a period of 30 days continuously, then again you will find that you are not covered. So even though insurance policies can be difficult to understand, pay special attention to the exclusion clauses and insist on an all risks and eventualities policy.
Some insurance companies stipulate that they cover the replacement cost of the property and others they cover the value of the property. The difference is that if, for example, you have a building which has no value (it may be very old or because the land value is so high that the buildings have no added value as such), you will find that the insurance company will not pay. For example, if you own an old house on a Makarios Avenue plot worth £1 million development value and your building is damaged, then the insurance company can claim that since the value of the property is found in the land, there is no damage payable, despite the fact that the insurance company was happy for you to insure the building at the value which you stipulate. If the only thing you want is to have the money to rebuild it, you will be uninsured. So, in this case, you should take out an insurance based on the replacement cost. The insurance company will pay only if and when you actually undertake to rebuild the house. So do not expect to keep your £1 million plot and get the replacement cost of your house without rebuilding it. If, however, you do not insure the value of this house, but you insure its replacement cost, then the insurance company is liable to cover you for the rebuild.
Also you will find on many occasions, that the replacement cost is higher than the market value of the building. If we are to take an aged apartment of low quality having a market/sales value of £40,000, the replacement cost might be more than £60,000. So be very careful and we suggest you insure your building on a replacement cost basis, i.e. the cost of demolition, clearance, new design and permit costs, construction building costs, VAT etc. As an indication of the cost for an ordinary apartment, replacement cost is approximately £600/m². Replacement cost means rebuilding the property as new using the same materials/quality that the building currently has so you cannot claim to replace tiled floors with granite, etc. Care is needed however since if in your effort to reduce the insurance bill, you estimate a replacement cost lower than the actual, then the insurance company will pay the analogous reduced amount. (If your house has a replacement cost of £100,000 and your insurance is for £70,000, the insurance company will pay only 70 per cent of the replacement cost. If you overestimate your property, the insurance company will only pay the actual amount as a maximum).
Another problem that you must consider is that over and above the replacement cost of your building, you must also take into account the common areas, such as basements, parking, swimming pool, private roads etc. For this reason, it is recommended that in the case of a building/project with numerous units, a comprehensive assessment is made at regular intervals (say every two to three years), which will cover the units themselves and the common areas. Bear in mind that building costs increase by at least 10 per cent p.a.
Another problem, which is quite difficult to solve, is what happens if in a comprehensive project, such as a block of 10 flats, eight units are fully covered, whereas the other two are either under insured or have no insurance at all! In such an event, the project cannot be rebuilt (since the replacement cost is paid when you actually replace the property, what is the legal situation in this case?). For this reason, for projects that comprise more than one holding, a comprehensive insurance should be undertaken and paid as part of the common expenses so as to reduce the risk described above.
Of course insurance claims do not happen often and for this reason not many people have an adequate insurance cover or the above details are not given proper attention as a priority. It is strange, since, we are all happy to pay £100,000 for an apartment, but we become quite difficult when paying an amount of money to protect this investment.
What is even more irritating, is that, should you obtain a loan from a bank and the bank itself insures the building and suddenly the bank/insurance has to pay up the insurance amount if you are underinsured, then you must pay the insurance/bank the difference!
As far as the individual buildings are concerned, it is the responsibility of each owner to cover his property adequately and to seek explanations from the insurance company and seek some form of a “fully comprehensive insurance – all risks”. For these reasons, but more importantly in case of joint ownership you must insist on a comprehensive insurance for the whole project, including roads etc, which should be updated every two to three years, getting a new valuation by a qualified valuer.
Food for worrying thoughts?
n Antonis Loizou & Associates Ltd – Chartered Surveyors & Property Consultants. [email protected], www.aloizou.com.cy
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