Protecting Your Personal Investment – Fire Insurance For Residential Property
Buying your first investment property or a house to shelter is a big responsibility. Maintaining and protecting it from damages and being destroyed is often the dilemma of a new house owner. Most property, be it residential or commercial, when it involves mortgage, the financing institute will require at least a basic fire Insurance policy to cover the property they are financing. This is to ensure that the bank interested is protected from losses due to fire.
When arranging for a fire insurance policy on your property, you need to understand some fundamental principles on how insurance works. One of the fundamental principles of insurance is the principle of indemnity. The principle of indemnity means that the insurance company will compensate you base your your losses before the incident happens, and not better. Simply put you cannot make profit out of insurance cover.
Most basic fire insurance policy will indemnify the house owner in the event that the property insured is destroyed by
Lightning and/or
Domestic gas explosion.
This might be differed in different countries, but the basic cover of fire insurance policy remains the same. The occurrence must be under any unforeseen circumstances, i.e. accidental and not intentional.
So the question now is how do you arrived at an adequate sum insured that is both acceptable to your bank and not wasting money unnecessarily. Most banks will require the house owner to insure a sum more than the mortgage amount. And this has became an unofficial yard stick. While this is often adequate for most cases but may not be enough when your mortgage amount is low as compared to the value of your house. In this situation, if the house is totally destroyed by the fire, the bank will be able to recover their losses from the insurance company enough to settle the mortgage outstanding amount, whereas you as a house owner will leave with ashes of the ruin.
In order to adequately cover your losses in the event of a fire and be able to build back your house, you need to determine an optimum sum insured. The determining factor is to ask yourself this question “What would be the cost of building the house back to it original state if it is totally destroy by fire? This sum normally excludes the cost of the land, the foundation, drainage and sewage system that might not be destroyed by fire.
It is always safer to insured a little higher than the cost of repairs or to reinstate the building but not too much higher. To insure a sum much higher than it should be will be a waste of money as insurance company will not pay more than what is justify. It would be ideal if you have a valuation report as , the valuation report will indicate the sum insured of a property which is much lower than the price you paid for the house You can just insure the recommended valued by the valuation company and this value will be a yardstick on the cost of the building in the event of a fire.
In all cases, always insured through a reliable and qualified insurance consultant and if in doubt, check with the relevant authority in charge of insurance.
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