Cash buyers not keen on property insurance cover

Cash buyers of property units in Dubai are unwilling to take insurance cover, finding it to be an "additional" burden even though the Strata Law makes it mandatory, according to real estate analysts.

The Strata Law, officially known as Law No 27 Concerning Ownership of Jointly Owned Properties in Dubai, makes it mandatory for all property owners to have insurance cover. However, at present only those with mortgages are taking insurance on their properties.

Regulations governing the Strata Law are yet to be released.

Insurance is important to protect the purchaser from the risk of damage to the property, said analysts.

"Insurance is clearly an additional expense when purchasing a property and many homeowners would not wish to incur this extra cost if they could avoid it," said Brent Baldwin, an Associate at Dubai-based legal firm Hadef & Partners.

"We are aware that cash buyers sometimes take on the risk of insurance themselves, although this is more common for villas than apartments. In our view, prudent purchasers should always take insurance to protect themselves."

David Bugden, CEO of PRDnationwide, said: "The UAE has a large number of properties that do not have mortgages and our research has found that a considerable number of those properties are generally not insured."

Mortgage lenders in the UAE insist that borrowers take insurance at the time of purchase.

"All lenders require home insurance to be taken when a property is mortgaged, though contents insurance is usually voluntary," said Bugden. "This is a common practice by lenders all over the world."

Baldwin said: "It is not compulsory for homeowners to insure their property in Dubai unless they have a mortgage. In many developments, such as apartment blocks, a developer will insure the entire building and recoup the cost through service charges.


Compulsory insurance

"The new regulations to be issued under the Strata Law are expected to make it compulsory for owners' associations to insure jointly-owned communities for an amount that guarantees the maintenance or reinstatement of properties in case of deterioration or collapse. Although the law is not fully in force yet, this requirement is in many cases already being met by developers personally, with the costs being passed onto the owners in the community. In addition, property owners who rent out their properties should ensure that they are covered for damage or loss caused by tenants, including damage caused to third parties."

Darren Terry, Vice-President of Marsh Insco, a joint venture between Marsh Incorporated and Emirates NBD, said: "Lenders ask purchasers to have insurance on their property that would fully indemnify them for the full reinstatement value of the property, whereas a cash purchaser of a villa is generally free to decide whether to insure the property or not.

"The only other obligation to insure property falls under the proposed Strata Law, whereby individual unit owners of what is considered jointly-owned property are required to insure the development. The owners' association is obliged to maintain insurance for the repair or full replacement value of the jointly-owned property and also third-party liability. The cost of this insurance is then recovered through the service charges."

Baldwin said in a well-managed jointly-owned property development the developer or owners' association would insist buyers take insurance and would have the names of each property owner noted on the policy. "A prudent buyer of jointly-owned property should always check this issue before making a decision to purchase and should also ensure that they are personally noted on the insurance policy," he added.

Bugden said the Strata Law would make it mandatory for an owners' association to take building and public liability insurance and possibly other forms of cover, but this would only cover damage to the actual building and common areas and facilities.


Contents cover

"If a building is burned to the ground, for example, the policy will generally cover the cost of rebuilding it and, therefore, your unit. However, it may not cover any contents within a person's unit or villa such as furniture or electrical goods. Each policy will be different and people need to check the details of the owners' association policy and seek the advice of an expert. It would be advisable for individual owners to consider taking separate contents insurance for their strata properties," he said.

Bugden said if damage occurred to a property as a result of, say, a fire and the property was not insured, as long as the damage was not the fault of a person or entity, then generally the property owner would need to cover the cost of rebuilding or reinstating the property.

"In the case of total destruction, this could result in a huge loss," Bugden added.

Baldwin said if a property was not insured then at the very least the owner would have to pay for the cost of repair or reinstatement out of their own pocket.

"In addition owners could be personally liable for damage caused to third parties, such as neighbouring property owners, if a fire spreads to other properties. A good insurance policy will protect a property purchaser from all this risk."

Terry said if a property was uninsured and a loss occurred then the owner would be unable to recover the asset or its value.

"However, if the loss is the result of a negligent act by a third party, such as the spread of fire from one property to another, then the owner can look to recover this from the responsible party," he added.

Bugden said it was important for property buyers to seek advice from an expert, such as a property insurance broker, and obtain details of exactly what an insurance policy covers – and, importantly, what it does not cover. He said the most common terms used were home insurance and contents insurance.

"Home insurance covers against damage to the actual property such as fire or structural damage. Contents insurance covers loss or damage to contents within the property such as furniture and electrical goods. Fire insurance cover, for example, will cover the purchaser against damages caused by fire, explosions and natural phenomena. Accident and liability insurance will generally cover the buyer against damages resulting from personal accidents, work accidents, theft and burglary."


Owner liability

Terry said the procedure for taking insurance varied, depending on what was being insured.

"Usually for a single residential unit, such as a villa, the process is quite fast," he said. "It is simply a matter of completing a proposal form with the description, value and location of the property and the cover can be provided in a matter of hours. For a larger multi-owner or tenanted property, insurers will require a detailed underwriting submission considering exposure, level of cover, values, extensions and exclusions. Insurers may also wish to carry out a risk survey. This process can take anything from a week to a month."

Normally, an insurance policy would be on a full reinstatement or replacement basis. "The basis of indemnity is not necessarily the market value of the property and fixing a value for the replacement cost may require a professional valuation. For buildings this would generally be the case," said Terry.

"In a jointly-owned property you could have fixtures and fittings that are part of the common areas, which again would be insured for reinstatement or replacement value. You also need to consider machinery that forms an integral part of a building such as lifts, which can be insured against damage or destruction but can also be insured in respect of a breakdown that would be excluded from a property damage insurance policy."

Terry added that for larger developments the basis of cover can be a first loss limit as opposed to reinstatement or replacement.

"On this basis, the owners will determine what their maximum foreseeable loss would be following a catastrophic event and set the limit at this amount. By doing so premium discounts can be achieved," he said.

Terry said property insurance covering physical loss or damage to buildings, contents or stock was widely available from both local and international insurers registered to operate in the UAE.

"The insurance market has substantial capacity and is able to underwrite property risks and portfolios with extremely high values. To a certain degree it could also be said the market is capable of underwriting more technically complex risks.

"For extremely high-value and/or technically difficult risks, such as for very tall buildings, tunnels, bridges and marinas, insurers seek additional reinsurance support from both the local and the international reinsurance markets.

"The market is extremely competitive with regards to pricing with insurers eager to gain market share and therefore premium volume in order to compensate for the reduction in investment income that they have historically relied upon to ensure their business remains profitable," said Terry.


Different options

Baldwin said there were different ways of insuring a property.

"Full replacement should cover all reinstatement or repair costs and there should be no further liability on the part of the homeowner apart from any prescribed excess," he said. "Other policies, however, allow an owner to insure for a set amount.

"The cost of the latter option may be lower but in the case of total destruction the homeowner could, for example, have to pay additional sums to reinstate their home if construction costs have risen above the amount they have insured their property for."

Ronald Hinchey, Resident Partner at Cluttons, said reputable building contractors would have replacement insurance cover until the completed building was handed over to the developer or owner.

"It may also be wise for buyers to take public liability insurance in the event that a visitor suffers injury as a result of something on the premises," he said.

Bugden said insurance charges were never fixed as they depended on the value of a property, the cost required to rebuild or reinstate it and the value of the contents.

Baldwin said charges vary between different insurance firms.

"The cost is dependent on a number of factors such as the size of the mortgage and the value of the property," he said. "A good policy should cover an owner for full replacement so that the insured does not have to pay any repair or reinstatement costs personally apart from any prescribed excess, and should also cover an owner for third-party liability for damage caused to neighbouring properties."



Home Insurance Legal Lequirement For Mortgages

All property buyers in Dubai are legally required to take home insurance if they have a mortgage.

"This is part of Law No 14 of 2008 Concerning Mortgages in Dubai, which regulates property mortgages and the relationship between the lender and borrower," said Sundar Parthasarthy, Senior Vice-President and Head of Retail Assets at Abu Dhabi Commercial Bank.

"Before this law, property insurance was offered by finance companies from a risk mitigation angle to protect collateral from natural and unnatural dangers.

"For a lender mortgages are very high-ticket-size loans and the risk of default is mitigated by collateral as security. If the property unit is not insured, then the lender's level of risk due to natural and unnatural disasters increases.

"With a natural disaster, such as an earthquake, a bank will lose all its collateral security and won't be able to mitigate the customer's risk of default. Hence, property insurance is mandatory with every loan."

Parthasarthy said the rates charged by lenders were minimal. "The charges of the insurance are very minimal and the premium amount is equal to 0.04 per cent per annum on the original market value. For example, on a property value of Dh1 million, the customer has to pay a premium of Dh400 per annum to get cover for this amount.

"In the last six months property insurance premiums have not changed despite the slowdown in the real estate sector. This is because the premium is related to the risk of damage of the property due to natural and man-made disasters and has nothing to do with the slowdown.

"When underwriting a policy, the reinsurer has to see the impact of various external and internal factors, which cause natural and man-made disasters," he added.

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