Insurance shortfalls no more

Homeowners and tenants in the UAE often give short shrift to property insurance. Attribute it to the "evidently" low crime rate in the UAE or the transient nature of the population here, which imparts a false belief of being impervious to eventualities. However, the recently introduced Jointly Owned Property (JOP) Law could considerably alter the dynamics of the local home insurance industry, given the onus it places on owners' associations (OAs) to cover buildings for their "full replacement value".

"Building insurance should be on top of everyone's list when buying or renting a property in the UAE. However, lack of awareness of the need for building insurance to protect against accidental damage, such as fire, and the effects of natural disasters, is a key obstacle that needs to be overcome," says Rumi M. Sanjana, director, general insurance, Nexus Insurance Brokers LLC.

Also, given the fledgling nature of the home insurance market, the importance of having adequate cover comes to the fore only after an accident or some kind of disaster. Home insurance protects your home and belongings not only against theft but also fire, water, natural disasters and any other unintended accidental damage. 

Banks can't enforce home insurance

With most owners shunning paying a steep premium, a vast majority of buildings in the UAE face an insurance shortfall. While banks do insist that homeowners produce a building insurance certificate prior to securing a mortgage, this cannot be enforced by law. "From a legal perspective, it isn't mandatory, but it certainly makes good economic sense. Remember, you are purchasing one of the largest assets you will ever buy and, whether mortgaged or not, you will be at a significant financial disadvantage if the property is damaged or rendered uninhabitable. Home insurance is a way of mitigating that risk. From a bank's perspective, it also makes sense to secure our financial interest. We always advise the customer who takes a mortgage from us to have adequate home buildings insurance," affirms Phil Ashkuri, head of insurance, UAE HSBC.

Home insurance can be categorised into building insurance, which covers damage to your actual property, and contents insurance which covers damage, theft or loss of your personal belongings. Landlords typically take out insurance only for the actual property, not the tenants' belongings. Therefore, it is advisable that tenants request to see the home insurance policy before renting a property.

"We do have storms and thefts here and, of course, we all occasionally lose items of value or accidentally break household items. Home insurance can provide financial compensation for these and certainly helps when more significant events occur, such as a kitchen fire or water leak," clarifies Phil. 

Contents insurance for personal goods

Under the JOP Law, the OAs will be required to take out building insurance, with each unit owner chipping in towards the total cost. While tailor-made strata insurance policies will cover the contents owned by the OA, it is prudent for homeowners and tenants to further take out a contents insurance to protect their personal items — such as carpets, refrigerators, televisions, clothing and furniture.

Here's a caveat before purchasing your home insurance policy: ensure that the insurance is for actual new replacement cost, i.e. the cost of rebuilding the house and replacing the permanent fixtures and contents as new, rather than just the market value of the house.

"Many buildings do not have a current replacement valuation — the law only makes this a requirement every three years — so, it is difficult to know the true extent of under-insurance that exists in this market. The fact is that most buildings will have a traditional commercial or residential property insurance in place with no recent professional valuation and this leaves them, potentially, with gaps in cover," reckons David Ellis, general manager, CHU — Orient Insurance.

Another point to consider while choosing your cover is whether you want the insurance policy to pay for alternative comparable accommodation while your home is being rebuilt.

In the wake of the implementation of the JOP Law, local insurance firms are developing specific products designed specifically to protect owners and their newly formed OAs against a wide range of risks and exposures. These include, for example, office bearers' liability insurance for board members, fidelity guarantee insurance and machinery breakdown insurance. 

Full replacement value of home

According to Gary Bugden, chairman, PRDNationwide, "I believe the JOP Law will result in more insurance being taken out, both in terms of the number of policies and the level of cover on buildings. The co-operative insurance scheme required by the JOP Law is by far the best solution. However, it will require insurance to cover full replacement and reinstatement and that will be more expensive than what would currently be the norm. This is particularly the case as developers move their "blanket covers" [i.e. multiple buildings under one policy] to individual building covers in the name of the OA."

While buildings with large service charge arrears are grossly under-insured, with the OAs taking charge, this is likely to change with board members chasing up delinquents to make payments. "If OAs under-insure, then they will be at loss in the event of a major claim since every insurance policy has under-insurance penalties," informs Sanish Velayudhan, deputy general manager at Gargash Insurance. Claiming that local insurers do not cater to the home insurance sector on a large scale owing to the low premiums, Sanish adds, "The level of penetration is quite low. Among the Emirati, Arab and Asian population it is very low, however, it is very high among European and other Western expats where there is much more awareness."

Specialist policies 

The number of standard property insurance policies is expected to decline as more owners now take up specialist strata insurance plans.