to secure a right over the proceeds of any claim and insist that they be applied to remedy the subject of the claim or to reduce the mortgage debt.
The lender will include these minimum requirements in its mortgage deed or conditions. The extent of insurance cover required by lenders varies, but there are about a dozen 'standard perils' against which most properties are covered. These include:
- explosion, lightning, thunderbolt and earthquake:
- fire and resultant smoke damage;
- riot, civil commotion and industrial action;
- vandalism and malicious damage caused by riots, strikes and civil disturbance:
- aircraft and other aerial devices and damage by articles dropped from them;
- storm and flood;
- subsidence, landslip and heave;
- theft and attempted theft:
- escape of water due to freezing or bursting of pipes;
- impact by vehicles and animals:
- breakage and collapse of aerials and satellite dishes;
- leakage of oil;
- damage caused by falling trees, telegraph poles and lamp posts.
Some of these perils carry excesses - where the borrower has to pay a specified amount of each claim. Non-standard perils include public liability cover. This insures third parties who suffer injury through an accident on the insured property. Some insurance policies also carry exclusions -conditions under which the insurer will not pay. For example, if a property is in an area where subsidence is common, it may exclude claims arising from this peril (and lenders will therefore probably not lend).
Standard exclusions include:
- damage caused by escape of water or oil whilst the property has been left unfurnished;
- damage caused by falling trees and branches to gates, fences and hedges:
- any theft or attempted theft if the property was unoccupied and windows and doors had not been fully secured;
- damage to a heating system caused by rusting, corrosion or wear and tear.
Many policy-holders are annoyed by the practice of insurance companies in respect of excesses, yet they do in fact keep the cost of insurance down. If excesses were not applied to insurance claims, the volume of claims would increase significantly and probably increase the cost of insurance for everyone.
Not all insurance policies are the same. Generally, very much cheaper deals can provide inferior cover. As most insurance companies build special features and benefits into their policies, however, it is difficult for the borrower to assess value for money when evaluating price and non-price benefits. Through Money Highway's insurance provider; Rapidinsure, the client is guaranteed quality cover, every step of the way.
The lender will insist that the property is covered at all times. If the borrower fails to pay the premiums, the lender will pay on his behalf and debit the mortgage account, ensuring that continuous cover is in place at all times.
Insurance value is determined by the valuer at application stage. It may be more or less than market value, depending on the type of property, method of construction and a range of other factors.
Most modern policies are index-linked, increasing the level of cover each year. Premiums rise in accordance with this. This goes some way to ensuring the property is adequately insured. Whilst the potential owner will not own the property to be purchased until completion, it is normal practice to put the buildings insurance policy in force upon exchange of contracts, because this is when the buyer becomes legally committed to the purchase.
The index-linked value of a property for insurance purposes is usually based on a published indicator, such as one relating to construction prices.
Despite the introduction of index-linking of policies, there are many borrowers who are still heavily under-insured. As most borrowers tend not to take much interest in insurance, it is an area where Money Highway advisers have a really pro-active role in encouraging their clients to protect their own interests.
Many borrowers are unaware that being under insured could result in the amount paid out in the event of a claim being reduced accordingly. For example:
House insured for £50,000. House insurance value £100.000
If the customer was to make a claim for. say £30.000, the insurance company might only pay £15.000 (less any excess), on the basis that the insurance was for only half the amount it should have been, therefore the settlement figure might be reduced accordingly (i.e. £30,000 x 50%. This is known as the Principle of Averaging. Arranging your buildings and contents insurance through Money Highway and Rapidinsure negates this possibility.
Despite nearly all lenders offering index-linked policies, there are many borrowers in the UK who are seriously under-insured. Money Highway Mortgage advisers will take every opportunity to address this when they interview existing customers.
In property insurance matters, the principle of indemnity applies. The insurance is designed to put the claimant in a position after a claim that is no better and no worse than that which existed prior to the claim. As a result, a borrower can only have one policy - if there is more than one policy, the insurance companies will simply split the claim pro rata. Many insurance companies now participate in a national claims register to prevent multiple claims as well as more widespread fraudulent practices.
Rapidinsure reviews their range of products, their features, benefits and limitations on a regular basis, to provide premium cover for our clients.
Block policies can be administered by the lender, so the insurance company merely establishes broad criteria for acceptance of cover and receives a schedule of those to whom policies have been sold. The level of involvement by the lender in claims administration varies. Quite often, these policies are heavily branded. Some are offered through subsidiary insurance companies, whilst others are brought to market in partnership with a reputable insurer. There are a few disadvantages of block policies arranged through the lender. These are.
- A packaged approach may not reflect specific needs.
- Some types of construction are not accepted.
- Higher value contents are often not covered.
- Policies may not cover prolonged absences from the property.
- Commercial/semi-commercial properties are usually not accepted.
- Higher value properties are usually excluded.
Lenders are obliged to allow a borrower to arrange his own cover seraparately. However, since the cover is there to protect the lender's interests as much as those of the borrower, the lender will only allow this if the property cover meets certain criteria. However, the insurer must also be acceptable to the lender.
The borrower is responsible for the property from exchange of contracts in England and Wales. This means that buildings insurance is the borrower's responsibility from that time and many lenders would therefore want insurance cover to be effective upon exchange of contracts.
Problems can arise if this is overlooked. Completion of the mortgage usually occurs after the borrower becomes responsible for insurance. If the property is damaged or destroyed between offer and completion of the mortgage, a situation could occur whereby the lender withdraws the offer but the borrower is committed to buy the property. Money Highway's dynamic Mortgage Advisors will lead the client through the mortgage and insurance maze. The way we operate is totally transparent. We don't complicate matters with jargon. We break the process down into manageable portions for our clients.
Your solicitor will be negligent if he fails to give proper advice about insurance and the risk and if you suffer losses. Money Highway can reduce such problems by giving the mortgage applicant clear advice. Quite often, the problem is eliminated by:
- putting the property 'on cover' as early as possible - this can sometimes be done prior to completing the formal proposal form, as many insurance companies permit 'days of grace';
- the vendor's insurance might extend through to completion of the mortgage - this is quite common with modern buildings policies.
It is worth noting that lenders have varying practices as to when and how they require the property insurance premium to be deducted and applied. This is because whilst, as we have noted, insurance cover becomes the responsibility of the buyer at the point of exchange of contracts (and it is clearly prudent to have the property "on cover" as soon as is possible), the transaction may in fact founder between then and the completion date. The question is then what happens to the premium which has been paid.
If the property is covered from exchange, but the prospective buyer does not in the end buy it, and the lender does not, therefore, lend against it, then neither of them has an "insurable interest" in the property. It is a principle of insurance law that the person taking out that insurance should be able to demonstrate that they have an interest in the thing being insured - and that they would suffer loss if it were damaged or destroyed.
Where the buyer is arranging his own cover, it will be the responsibility of his solicitor to confirm to the lender that cover has been arranged and in many cases a full or partial refunds will be possible if the sale falls through.
As we have seen, there is a need for the property to be insured continuously. If the borrower does not pay the premium, the lender will do so and debit the mortgage account with the value of the premium. For this to happen, all lenders must have systems in place to ensure that information is provided by the insurance company to the lender on a regular basis. Although the borrower has the right to choose, in practice this right is negated if the lender cannot secure appropriate information from the insurer.
A borrower who secures a lower priced insurance deal externally may be sacrificing quality of cover which may be uneconomic should a claim be necessary later on. One charge that borrowers cannot avoid is payment of insurance premium tax, which is levied on all household and contents policies (although it does not affect life assurances). Consequently, the process can be a daunting one. Let Money Highway and Rapidinsure give you total peace of mind with total professionalism.
