Be very careful about the value for which you insure your house. Losing it may seem a remote possibility, but if it does come about, the last thing you want is to find out your insurer will not cover your loss in full because you were underinsured.

When his Kuils River house was destroyed in a fire in September last year, Capetonian Brian Kewana was sure he was sufficiently insured. Having increased the sum insured on his homeowner’s policy every year in line with his renewal notices, he assumed he was adequately covered.

But he was in for a dreadful shock.

Absa Insurance found him to be about 40% under-insured. The insurer made him a settlement offer of about R567,000. But the lowest quote to rebuild his house is for about R927,000, leaving him R360,000 short.

Kewana had expected the insurer to pay him the sum for which the house was insured, about R876,000. But having found that the property was valued at R1.4m, Absa applied the dreaded “average clause”.

The “average clause” is one of the most important insurance terms you need to understand, Nedbank says on its website.

The average clause in an insurance policy requires that you bear a proportion of any loss if your assets were insured for less than their full replacement value.

So if your property is insured for less than it would actually cost to replace it, your insurer will pay out only a percentage of your claim.

In Kewana’s case, Absa Insurance is paying out only about 60% of what he claimed, based on its assessment of what the house ought to have been insured for.

The insurer took his sum insured (R876,379) and divided this by what it regarded as the value of the house when it burnt down (R1,433,757.33) and multiplied this by the damages (R927,346.72) to get about R567,000.

Kewana is disputing the insurer’s valuation of R1.4m, which he believes is inflated relative to other homes in the area, and is appointing his own quantity surveyor to get an independent valuation of his house.

He is also questioning the mismatch between the sum for which he was insured and the insurer’s valuation of his home.

He took out insurance when he took out his bond after buying his new home 10 years ago. The home was insured at the bank’s valuation and since then he has accepted the insurer’s recommended escalations in the sum insured.

He therefore believes his home was insured for the correct amount and it is unfair for the insurer to now find such a big gap between the value of the home and the sum for which he was insured.

He admits he did renovations, which he did not inform his insurer about, and this could have created some of the difference between the valuation and insured sum.

But he says he didn’t know he needed to inform his insurer.

Edite Teixeira-Mckinon, the deputy ombudsman at the office of the ombudsman for short-term insurance, says the responsibility rests with you to know the value of your property.

“An insurer won’t know if you’ve made upgrades to your property. On the other hand, there is an obligation on insurers to say, ‘Are you sure it’s the correct sum insured? If you’re underinsured, we will be in for the sum insured only and you will be in for the rest.’ “

The insurer has this responsibility because it is limiting its liability and this must be pointed out to you in terms of the
Policyholder Protection Rules, says Teixeira-Mckinon.

Financial services providers are also bound by the Financial Advisory and Intermediary Services (FAIS) Act to point out to you any material conditions in a policy.

Last year, the FAIS ombudsman issued a determination in favour of a consumer whose house burnt down and whose claim was rejected on the grounds that he had failed to inform his insurer that he had added a pizza oven to his property.

The homeowner complained that he hadn’t been aware of the stipulation to inform the insurer of such a change to the property.

Like Kewana’s, his policy was concluded during the bond application.

The ombudsman found that the insurer had a duty to provide concise details of any and all material terms of the contract.

“The mere provision of policy documents and policy schedules subsequent to the rendering of a financial service does not negate the financial service provider’s responsibility to make disclosures with regards to exclusions,” the ombudsman said.

Working out an accurate sum insured is tricky for the lay person. Santam, SA’s largest insurer, will waive the average clause for five years if the policyholder uses one of three “tools” offered by the insurer, says Glynn Young, the manager of underwriting governance at Santam. The tools are: