Flooding this monsoon underscores the need to buy home insurance, says Tarun Mathur.
According to news reports, floods affected more than 34 million people across 280 districts and caused more than a thousand deaths over the past year.
Such devastation happens during the monsoon in parts of the country almost every year.
These calamities not only take a toll on life and health but also cause mammoth financial loss.
It is estimated that 800,000 homes were destroyed by floods this year.
Given the scale and regularity of these events, purchasing a home insurance cover has become imperative.
Structure, content and third-party cover
Home insurance is a nascent product in India, with very low penetration. But, it can minimise financial losses to a great extent in a natural calamity.
It consists of two parts: Structure and content.
Home insurance for the structure protects the fabric of a building, permanent fixtures, and built-in items like air vents or chimney.
Content insurance provides cover for personal belongings such as furniture, jewellery, electrical appliances and other collectible items.
A comprehensive home insurance plan is a blend of both types of cover that provides risk coverage to both the structure and the contents of a home.
Apart from structure and content, home insurance also protects you against third-party liabilities.
A third-party liability cover protects you against any lawsuits for property damage or bodily injury that your family member, pet or you might cause to other people.
If your dog accidentally bites anyone in your premises, you are covered from lawsuits.
Before buying a home insurance cover, make a list of requirements.
If you own a house, you must buy a comprehensive all-risk plan.
All-risk plans cover risks against all types of natural and man-made disasters, including flood, storm, terrorist attack, and even malicious damage by an outsider.
If you are a paying guest or live in a rented house, you need to cover only your belongings under content home insurance. Structure insurance is the responsibility of the owner.
Once you know what you need, buying home insurance is not cumbersome. You can do so online by filling the required details.
Choose your plan and add-ons carefully, and disclose all your belongings honestly.
Non-disclosed belongings will not be covered in case of damage.
A wide-ambit cover
The coverage offered by your insurance depends on the type of property you own.
The valuation of your house takes into account three broad things: Cost of land, cost of reconstruction, and geographical cost.
Geographical cost in this context means the cost of construction and of land differs from one locality to another.
This is always factored in while calculating the value of a house.
For an independent house, insurer only covers the cost of construction, as the policy is for the structure only.
A construction contractor or a real estate broker will be able to help get an estimate of the cost of construction, which varies depending on the city and type of construction.
The latter has a major impact on calculating your premium, and you need to disclose it before the estimation.
The sum insured is decided based on one of two bases: Market value or depreciated-cost basis, or reinstatement basis.
Market value is the cost of reconstructing your house after deducting depreciation.
Reinstatement cost is the full value of reconstructing the house, eliminating the depreciation.
The premium for a home insurance plan where the sum insured is calculated on reinstatement basis is generally Rs 1,000 to Rs 1,500 higher than the market value insurance.
Policies that provide cover on a reinstatement basis should be preferred.
Pointers for purchase
If planning to buy home insurance, here are a few points you should keep in mind while choosing a plan.
Avoid being underinsured, as this could hurt you financially at the time of a claim.
Declaring a price for your property that is below the market price to only get a lower premium rate is referred to as underinsurance.
The insurer could penalise you for this by making a lower claim payout at the time of settlement.
For instance, if the cost of construction of your house is Rs 1,500 per sq ft, and you knowingly or unknowingly buy a cover for Rs 700 per sq ft, the insurance company will regard this as underinsurance.
It will then pay you only half the sum insured at the time of claim, and the final amount will be calculated at the rate of Rs 350 per sq ft, as penalty for misinformation.
Buying an all-risk policy is advisable.
A standard home insurance policy only covers allied perils like fire.
To include threats like flood, earthquake, landslides, etc, you need to buy an 'all-risk' plan as an add-on.
Ask for the 'new-for-old' add-on. This is available with comprehensive insurance and content insurance plans.
Having this add-on means your insurer will replace your damaged or lost item with a new product, rather than reimbursing the depreciated value of the item.
However, only items not older than five years can be covered under this add-on.
Also consider buying a worldwide cover.
This add-on stretches the protection abilities of your insurance policy outside the country as well, by providing cover against all types of damage to your belongings, be it flood or other natural and man-made calamities.
If you carry your belongings like laptop or camera while travelling away from home, have these items covered.
Finally, do not start repair work without informing the insurer.
Doing so will make it impossible for the insurer to estimate the extent of damage.
The insurer may even view your claim as fraudulent, as the necessary inspection did not take place.
Making a claim
Every insurer has its own intimation period, within which you need to inform it about the damage. This period varies from seven to 15 days.
Before filing a claim, lodge a first information report, stating the damage that your house has suffered, and submit it to the insurance company with your claims forms.
The claim process, especially after a calamity, tends to be hassle-free as several claims come from the same region, which ensures the authenticity of your claim. You need to document the damage through pictures as proof in case of terrorist activities.
The insurer then inspects the damage and settles the claim.
Water entered houses in low-lying areas in Mumbai after heavy rain, August 29, 2017. Photograph: Sahil Salvi
Tarun Mathur is co-founder and director, Policybazaar.com