Good news, and bad, for flood-hit homeowners
The good news for the thousands of KwaZuluNatal homeowners whose homes were totally or partially destroyed by raging floodwaters is that their insurers will most likely settle their claims.
But the bad news is they could only be paid about half of the replacement costs.
That’s because almost 80% of South Africans are underinsured by an average of 51.9% on their buildings and possessions, according to the country’s largest insurance valuator, Quantum Risk Assessment.
“When there is a substantial claim, insurers pay an assessor to value the insured property and/or contents, and if the client is found to be underinsured, they apply what the industry calls ‘average’,” said Christelle Coleman, CEO of Ami Sure, underwriters on behalf of Constantia Insurance Company.
That means the payout is reduced by the percentage of underinsurance. So if a home is found to be underinsured by 40%, the insurer will reduce the claim payout by the same percentage.
“As a result, there is often not enough money to rebuild or restore,” Coleman said.
Many homeowners make the mistake of insuring their homes for the market value, not the replacement value, Coleman said.
“A property’s replacement value — the cost of demolishing and reconstructing the building to the same specifications in the case of total destruction can only be assessed by a qualified and experienced professional valuer.”
Addressing fears that there could be widespread rejection of “subsidence” claims, given that many policies offer limited or no cover for subsidence and landslip, Edite Teixeira-Mckinon, CEO at the office of the Ombudsman for Short-Term Insurance, said building insurance covers loss or damage caused by a sudden, unforeseen and single event, such as a storm.
“In order for an insurer to escape liability for loss or damage following a massive, powerful storm, they would need to show that the damage to the insured home or building was not caused by the storm but by one of the excluded perils, such as a lack of maintenance or defective construction,” she said.
“Our office will make a decision by weighing up the evidence provided by the parties and on a balance of probabilities. If the insurer relies on an exclusion in the policy to reject such a claim, they carry the burden of proving its rejection.”
Assessors would probably need to be appointed to confirm the cause and assess the extent of the damage caused by the storm, Teixeira-Mckinon said, and only in exceptional circumstances would an insurer appoint an engineer or request the insured to do so.
Coleman is optimistic that most flood-related claims will be approved.
“Clearly the proximate cause — the cause having the most significant impact in bringing about the loss — would be storm-related and that is one of the core perils on all building insurance policies, along with fire.”
But insurers do exclude flood cover in areas which regularly suffer flood damage, Coleman said.
Homes in the Breede River Valley in the Western Cape, which gets flooded almost every year, can largely no longer be insured against flood risk, she said, and the same applies for fire cover on thatched buildings at St Francis in the Eastern Cape.
Insurers may well respond to the devastating KwaZulu-Natal floods by imposing higher premiums and restrictive terms on policies covering properties built near rivers and on ocean fronts where risk exposure is particularly high, she said.
“Additional restrictions are often pushed down on insurers by the reinsurers who will be picking up all these claims ultimately in their catastrophe reinsurance programmes.”