Homeowners in South Africa all have to do with homeowner's insurance policies at some time or another during the period that they own South African real estate. The actual idea behind homeowner's insurance is to protect homeowners against certain events that may cause damage or loss to their property, and so protect their investment.
Because the vast majority of South Africans cannot afford to buy our homes cash, homebuyers borrow money from financial institutions to finance their home purchases. Home loans are paid back over a looong time, and to protect the lender's investment, they force practically every owner of residential property in South Africa to have some sort of homeowner's insurance.
The home loan is secured against the property by a mortgage bond registered in favour of the lender. But to protect the lender's investment even further, they routinely require that homeowners take out insurance policies to protect against damage or destruction of their property. So, although the homeowner also gets the benefit of being insured, the South African lending institutions are the actual beneficiary of the majority of homeowner's insurance policies.
Homeowner's insurance, considering the large amounts that are insured, is actually quite cheap. But when one takes into account how many homeowners' insurance policies must be in existence in South Africa, it is clearly a mammoth industry. And the South African lending institutions have caught on a long time ago. Often, the insurance company that a particular lender will push onto buyers, who obtain a home loan from them, is very clearly and closely related to the lending institution.
This close relation between lender and insurance company can create problems, according to the South African Insurance Ombudsman. But this will become clear in the following discussion about homeowner's insurance policies in South Africa.
Sectional Title
When an owner of a sectional title unit in South Africa needs homeowner's insurance, the situation is a little different from full title properties.
A sectional title unit has a separate title deed, and is insurable. But all the unit owners in the sectional title scheme jointly own the common property, and the body corporate holds a composite insurance policy, which covers the interests of members of the body corporate and the body corporate as a whole.
Owners of sectional title units should make sure that they get a copy of this policy, and check whether they need additional cover on their units.
Misconceptions About Homeowner's Insurance Policies In South Africa
The idea behind homeowner's insurance policies is to protect the homeowner against damage and loss in regard to their property, which is their residence, for most South Africans. But because there is another party with a vested interest in the majority of property, the actual application of homeowner's insurance policies is to protect the lender who owns the mortgage bond registered over the property. And the homeowner's and the lender's interests is not always the same thing.
This fact, along with some realities about how insurance work, has caused some misconceptions about homeowner's insurance policies among homeowners. The way homeowner's insurance policies work is not always what South African homeowners "logically" expect.
What Damage Is Covered?
Some homeowners are under the false impression that their homeowner's insurance policies protect them against any and all loss or damage as a result of anything that happens to the property. This is just not true. Every homeowner should carefully read the terms of the homeowner's insurance policy. Some very specific events are described in there, and anything that does not fall into the events described in the homeowner's insurance policy terms, are not covered.
In order for the homeowner to claim for damage or loss, the burden of proof also falls on the homeowner. Yes, the homeowner has to provide evidence, and be able to demonstrate that one of the events specified in the homeowner's insurance policy is the effective cause of the damage or loss.
Homeowner's Insurance Policies Differ
Typical homeowner's insurance policies in South Africa will include cover against storm damage, fire damage, flood damage and malicious damage by a third party. Some homeowner's insurance policies may also provide cover against earthquake damage and subsidence (sink holes), but not all of them do. There are homeowner's insurance policies that cover a whole list of other events as well, and others that don't. One homeowner's insurance policy is not necessarily equivalent to another.
Inherent Defects In The Property
There might also be specific types of damage or loss that do not fall within the limitations of the homeowner's insurance policy, and all the causes which may bring about such loss are not covered.
An important example of such an exclusion from homeowner's insurance policies, which also probably causes the most unhappiness for homeowners, is inherent defects in the property itself. Yes, patent defects are not covered. Bad construction, shoddy workmanship and poor maintenance, which might cause damage or loss to the homeowner, are not covered. The homeowner might not have been responsible for causing the damage himself, but some previous owner or another party (the builder) is responsible, and therefore, the insurance company does not pay out.
I don't know if they figure that the homeowner can sue that responsible party for the damage, or not, but this is a far cry from the situation with car insurance. With car insurance the insurance company will pay out, and then put the screws on the responsible party for the damage. Why not with patent defects? Or is the damage too big, and therefore the homeowner has to suffer all the loss himself?
Something that upsets homeowners, who are caught up in a situation like this, is the fact that the lender and the insurance company is usually so closely related. The lender's experts inspected the property before the loan was approved, remember? And the lender decided that the property is good security for the home loan. So the homeowner feels justified to point the finger to the lender, because their experts should have picked up on the problem.
In South African real estate, there is no tradition of professional inspectors inspecting the property on the buyer's behalf. Many property buyers are actually under the impression that the bank evaluation of the property is for their benefit. South African homebuyers trust that the bank evaluation of the property will pick up on any defects, and therefore protect them from getting caught in the purchase of a "bad" property.
Therefore, if the bank's experts have failed to notice that the property was inherently defective or improperly maintained, how could the homeowner be expected to have noticed it? So, many homeowners feel that it should be the bank's problem, not theirs. And they insist that the homeowner's insurance policy should pay for the repairs, because in their minds, the bank and the insurance company is one and the same thing.
But the lender's argument, which is legally correct, is that the inspection that was undertaken before the approval of the home loan was only for its purposes and benefit. It was not intended to protect the homebuyer. Also, the insurance company is a distinct and separate entity. So, whatever the lender did and did not do will not affect the insurer's rights under the homeowner's insurance policy.
The South African Insurance Ombudsman says that the close relationship between the insurance company and the financier may in certain cases cause the Ombudsman to recommend an equitable compromise, but that the current South African laws makes it very difficult for the Ombudsman to conclude that disallowing the homeowner's claim within the strict terms of the policy is not justified.
Insured Value
Many homeowners are also under the false impression that the maximum amount stated in the homeowner's insurance policy is the amount that they would be entitled to if the property were destroyed. This is not necessarily the case.
If insurance was taken out for a particular sum, even if it was the lender who suggested that sum, that is not necessarily the sum which must be paid by the insurance company if the property is destroyed. The insurance company may take increases in the value of the property, increases in building costs and increases in reinstatement costs into account, to determine what the real insurance value should be.
Some insurance companies may automatically apply an arbitrary percentage increase every year, to provide for various increases that may occur. But this measure may not reflect the true situation. Every homeowner has a responsibility to keep an eye on the maximum cover under the homeowner's insurance policy, and to make sure that they are not in fact under-insured. If a homeowner is under-insured, the insurance company may be entitled to apply the dreaded "average", to reduce the amount of any claim.
The South African Insurance Ombudsman says that this is just the way things are. But I have never been able to understand why there is absolutely no responsibility on the insurance companies to keep their insurance policies up to date, or even to provide the hoards of uninformed South Africans with the information they possess, to make an informed decision to increase their cover or not. But I digress, so lets continue.
Who gets the money?
It is the homeowner who has to take out the homeowner's insurance policy, and the homeowner diligently pays the premium, so logically the homeowner gets the money paid out in regard to the property in the homeowner's insurance policy, right? Err, wrong!
The interest of the lender in the property is always recorded somewhere in the homeowner's insurance policy. The lender can either be named as a co-insured, or a notation somewhere in the policy document confirms the lender's interest.
There is often also an undertaking by the homeowner included in the homeowner's insurance policy terms, which states that whatever moneys are paid out in respect of a claim, will first be applied to reducing the liability to the lender for any outstanding balance on the mortgage bond registered over the property. And sometimes the lender is even entitled to the insurance money irrespective of any payments being due or overdue. That is, if the insurance company chooses to make a payment, rather than repair the damage to the property themselves.
So, the homeowner could be the last person who sees any insurance money from the homeowner's insurance policy. The insurance company puts the lender first in the line, and the assumption is probably that the lender and the homeowner have similar interests in regards to the homeowner's insurance policy. But the interests of the lender and the interests of the homeowner are not always the same.
Once again, the close relation between lender and insurance company causes problems. And the homeowners seem to be rather justly unhappy. Should financial institutions be allowed to force South Africans, who need home loans to buy their homes, to take out homeowner's insurance from a specific insurance company? Okay, if that sounds like unfair practice, what about forcing people to take out homeowner's insurance from the LENDER'S insurance company, even if they can get the same cover elsewhere, for cheaper?
Ha-ha! The situation vaguely reminds me of a mafia, lending money to a community, and then expecting everyone to pay "insurance money" against fire damage, malicious damage and the rest!
The time might have arrived to test the fairness and constitutionality of this obvious abuse of the lenders' powers. Had Microsoft engaged in similar activities, the outrage would have been deafening. But the banks in South Africa have had a free run with this racket for decades now. If the financial institutions can claim that they are "distinct and separate entities" from the insurance companies, when it suits them, they should also be forced to act like distinct and separate entities when it does not.
But the costs of litigation in the South African Constitutional Court, or the South African Consumer Courts would come to a princely sum. So, one homeowner would not be able to tackle this one alone. It would take a large homeowners' association, or a "class action", as the Americans call it, to get a ruling on this question. But I am off topic again, so lets continue.
The End Of The Cover
The homeowner's insurance policy exists for the benefit of both the homeowner and the lender. But subject to the terms of the homeowner's insurance policy, when the homeowner dies, the homeowner's rights come to an end, and the cover may automatically cease. The homeowner's insurance policy can also provide for the transfer of the homeowner's rights and obligations to his estate, though.
If the property is sold, and the property gets transferred from the homeowner to the new buyer, the homeowner's insurance policy ceases.
Once the bond is cancelled or paid off, the insurance situation changes somewhat. The lender no longer has any interest in the property, so logically it would seem as if the homeowner can at long last choose to get rid of the homeowner's insurance policy, which was forced onto him, and replace that insurance with another. But the South African Insurance Ombudsman's memorandum on this topic surprised me.
"A memorandum such as this cannot give detailed answers to all of these questions, but simply sound the warning that any change in the identity of the interested parties, in the ownership of the property insured and in the nature and rights attached to a property insured, may all bring about a situation where new cover is needed or the old cover has to be amended."
Yikes! So the South African Insurance Ombudsman says that homeowners who pay off their home loans might sit without insurance, if they don't amend the old policy or get a new homeowner's insurance policy. So, it might actually be in the homeowner's best interest to have a homeowner's insurance policy for his sole benefit from the start?
Homeowner's Insurance Policies
Now, I've ratted terribly on South African lending institutions and insurance companies, and I hope this will evoke some discussion among South African homeowners. Lenders and insurance companies are also welcome to comment, and set the record straight.
But the fact remains: If you own property in South Africa, and your back pocket is not deep enough to take the expense of replacing your home, you NEED a homeowner's insurance policy.
