The householder's insurance policy

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Source: Dalal Street Investment Journal

The householder's insurance policy may be the best way to secure one's home and precious belongings at a small price. Prakash Patil delves into the fine print of the policy to find out the pros and cons of buying the policy

A short circuit caused a fire in the house of Shirish Patel (name changed) at Borivali in Mumbai, and damaged his wall unit, television set and few other valuable items. Fortunately, the Patel family was at home and the family members were able to put out the fire before it could do any further damage. Apart from damaging the wall unit and other electronic items, the flames partially burnt the false ceiling and blackened the wall behind the wall unit as well as the adjoining wall. The total loss, including the cost of repainting the living room and repairing the false ceiling, was estimated at Rs 55,000. Fortunately, Patel had taken a householder's comprehensive insurance policy and received about Rs 40,000 from the insurance company.

This is just one instance of how our homes are vulnerable to damage due to various reasons. Imagine how much risk our homes are exposed to due to natural calamities such as earthquake, typhoon, flooding, lightening, among others, as well as man-made events such as rioting, terrorist attack, accidental fire, explosion, etc. It is imperative, therefore, that every homeowner should insure his home and hearth against such natural and man-made calamities by taking a householder's insurance policy.

The natural disasters such as earthquake, typhoon, tsunami, lightening strike, fire, landslides or monsoon deluge (ala Mumbai's 26/7 in 2005) can strike any moment and leave a trail of death, destruction and devastation behind. Also, terrorist attacks by anti-nationals and foreign mercenaries are becoming frequent in metro cities and escalating social and communal tensions can trigger riots, endangering lives and properties of citizens. Then again, one cannot rule out the possibility of burglary and theft in the house by hardened criminals. If the survivors of these natural calamities and man-made disasters have insured their homes and belongings, they would be able to rebuild their lives in double- quick time and move on.

The policy

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HOUSEHOLDER INSURANCE POLICIES
Insurance Company	Name of the Policy	Premium amount	Sum Insured	Other Details and features
Tata– AIG Insurance	Home Secure- Privilege- 1	Rs. 1005	Rs. 5,02,500	Covers fire & other perils (Rs 2 lakh) burglary & theft (Rs 2 lakh), ATM cash (Rs 2500) & public liability (Rs 1 lakh)
	Home Secure- Privilege- 1	Rs 719	Rs. 4 Lakh	Fire & allied-Rs 3 lakh, burgl & theft-Rs 1 lakh
		Rs 853	Rs 6 Lakh	Fire & allied-Rs 5 lakh, burgl & theft-Rs 1 lakh
Oriental Insurance	Sweet Home Insurance	Plan- A Rs. 543	Rs. 8.30 Lakh	The premiums are for 75% or more of full value cover for fire and allied perils and burglary and housebreaking (excl. jewellery)
		Plan- B Rs. 810	Rs 12.50 Lakh
		Plan- C Rs. 1076	Rs 16.70 Lakh

The householder's insurance policy is specifically aimed at compensating losses suffered by homeowners due to damage to their houses and valuable belongings therein due to specified natural and unnatural causes. Of course, the policy does not offer cover against all calamities, but it does cover a whole lot of them which are most common (see box alongside). The policy can be taken by anyone, and it does not matter whether you are a landlord or a tenant. The best part is that the policy cover comes at a very low cost which everyone can easily afford.

There are two choices available in householder's policies: a comprehensive policy or a item-wise cover policy. The comprehensive policy covers the house as well as its contents, subject to specified upper limits for the value of the house and the value of each of the contents. For example, Tata-AIG's `Privilege' policy provides a cover of Rs 5 lakh against fire and allied perils on home and a content cover (excl. jewellery and valuables) of Rs 1 lakh against burglary and theft at a premium of Rs.853 per annum. Oriental Insurance offers three householders' insurance plans: Plan A offering sum insured (SI) of Rs 8.30 lakh at a premium of Rs 543, Plan B with SI of Rs 12.50 lakh at Rs 810 and Plan C with SI of Rs 16.70 lakh at Rs 1076. Other insurance companies such as New India Assurance, National Insurance, Bajaj Allianz, ICICI Lombard, Reliance General Insurance and IFFCO-Tokio General Insurance too offers householder's insurance policies. It must be noted that some of the insurance companies offer only comprehensive policies, while other companies offer choice of both, and offer discounts to those who insure items in excess of certain minimum number of items.

The Valuation Matrix

It must be noted that the value of the house for the sake of the householders policy is not the market value, but the cost of reconstructing the house if it is damaged. While market value is a combination of cost of land, cost of construction and demand and supply scenario, the policy takes into account only the cost of reconstruction. The sum insured is calculated by multiplying the built-up area with the construction rate per sq. ft. which may vary between cities. For example, ICICI Lombard recommends rates of construction depending on the city you live in. So for large cities such as Mumbai, New Delhi, Bangalore, Hyderabad, Kolkata, etc. the rate recommended is Rs 1,800 per sq. ft., while for mid-size and smaller cities, the rate is Rs 1,500 per sq. ft. However, the value is revised if expensive material such as marble flooring has been used in construction. Also, if the home has a lawn/garden surrounded by a perimeter wall, the reconstruction rate would be revised to include the cost of construction of the wall.

However, in the case of the contents of the house, the current market value of the item is taken into account. This is because the replacement cost of, say, a five year old refrigerator with a new refrigerator of the same make and size would be much higher than the depreciated cost of the old refrigerator.

However, while declaring the value of the contents, it is important to ensure that there is no under insurance. This means that the declared value of the property should not be less than the actual value of the insured property at the time of loss or damage due to fire and allied perils. If the value of the insured property is found to be higher than the sum insured, then the claim would stand reduced in the same proportion. "It is essential that all the contents in the household be insured. It should also be ensured that the identification details of the contents covered are correctly conveyed to the insurance company. Please furnish clear description, proper identification particulars and serial numbers of items proposed for insurance. They must be insured for their correct values. Kindly note that the under-insurance leads to reduced compensation. The sum insured for the covered items should be selected keeping in view the market value to avoid under insurance, except in case of jewellery where the sum insured should be the purchase cost. Please ensure that while proposing for insurance or at the time of submission of claim there is no misstatement or misrepresentation of the fact," says Rajan Srivastava, Regional Manager, Oriental Insurance Company.

Inclusions & Exclusions

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WHAT'S COVERED & WHAT'S NOT
INCLUSIONS	EXCLUSIONS
Fire & allied perils, explosion, implosion, earthquake, lightning	Willful destruction of property
Earth quake, lightning, landslide & rockslides	Theft and burglary by servants, employees and relatives
Riots, strike & malicious damage, terrorist attack	Loss and damage caused by war, civil war, mutiny, military rising, revolution
Storm, cyclone, tempest, tornado, hurricane, flood	Loss due to wear and tear and atmospheric conditions
Burglary, housebreak and theft	Loss due to confiscation, commandeering or destruction by the government
Damage due to impact by vehicles, railway accident and aircrash	Cash, bullion, painting, works of art, curios, manuscripts, antiques,etc.
Pipe burst and water tank overflow	Loss or damage due to radiation anc contamination from nuclear fuel
Note: Policy inclusions and exclusions given above are only indicative and may vary between policies of different companies. Readers are advised to check the inclusions and exclusions carefully before buying a policy

Most of the disputes between the insured and the insurance companies arise because of the fine print giving the inclusions and exclusions. It is absolutely necessary to read these carefully before taking householder's policy. Most of the companies do not cover valuable items such as gold and diamond jewellery, silver jewellery and silverware, precious stones, etc. or cover such items separately at additional cost. No company provides any cover for works of art, paintings, curios and antique items. Also, some of the insurance companies do not provide cover against terrorist attacks. Then, although damage due to rioting is covered, damage due to war, civil war, rebellion, military uprising or revolution is not covered. Damage due to confiscation, commandeering, requisition or destruction by the order of the government is not covered. It is interesting to note that theft and burglary by thieves and burglars are covered, but loss due to theft by servants, employees and relatives is not covered by the policy. (See details in box). "At the time of settlement of claim the loss is assessed by an independent licensed surveyor keeping in view the market value of the item damaged on the material date of loss (normally arrived at after applying depreciation for the year which it has run on the present new value) and comparing the same to the sum insured. It also may be understood that the Policy is based on the "principle of strict indemnity" i.e one has to be placed exactly in the same position in which he was before the loss none the better none the less with sum insured as the maximum liability of the insurance company," says Srivastava.

Be Safe & Secure

Considering the manifold benefits offered by the householders policy at a very small price, it is better to be safe and secure by buying it than to be sorry by avoiding it. After all, your peace of mind is certainly worth a few hundred bucks in a year. So, go get it!

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