Commercial property owners in South Africa are increasingly making costly mistakes when taking out property insurance, often through being given the incorrect advice, or not knowing what to consider when they purchase a property.
This is according to Gary Palmer, CEO of Paragon Lending Solutions, who said that although a number of clients know how to value property, they don't always understand which insurance policy is best suited for their needs and often get the wrong advice. "The most common mistake that buyers make is to under-insure, due either to being naïve to the risks that are involved, or they are sometimes given the wrong advice."
He explained that insuring a property incorrectly can lead to higher costs and potentially result in a significant financial loss.
Significantly lower than the replacement value
Harry Casper, director of Associated Insurance Brokers (AIB) Cape, the insurance partner of Paragon, agreed, stating that property advisors, banks and brokers, need to explain to buyers that they need to value a property adequately as soon as the purchase is completed.
"In some instances some banks incorrectly advise their clients to insure their property to the original bond value. However, the original purchase price can be significantly lower than the replacement value, especially while the property market is competitive with a number of good deals available. With that in mind, building insurance needs to meet the buildings replacement value."
Furthermore, Casper explains that standard insurance would typically cover damages to the "bricks and mortar", but the replacement value needs to factored in to replace the asset at the present time, particularly when dealing with commercial property.
"The replacement value can include fixtures and fittings, such as lifts, air-conditioning systems and paving to the common areas. Body corporate and sectional title buildings could include machinery and generators as part of the building. Being insured to the bond value would result in exorbitant costs to the buyer for failing to insure correctly."
The base value should be established up front
Palmer and Casper both agree that buyers should consult with a professional property evaluator as soon as possible to determine the correct value before insuring. "The base value should be established up front by an expert property evaluator and the policy should include an escalation clause to increase the premium to keep abreast of inflation. Because buyers need additional assistance," said Palmer.
Another mistake that property buyers fail to consider is if the property is occupied, or will be occupied, by a tenant. "If the tenant's business performs a high-risk function, that function could result in a higher premium. Commercial property buyers need to evaluate what function the tenant will perform and if it results in a higher premium the tenant should be responsible for that increase with this stated in the lease," Casper said.
In addition, the property owner should consider taking out rental insurance. "This will safeguard the owner from a loss of rent, should the property become damaged and requires the tenant to vacate the premises temporarily while it is being repaired. Liability cover should be included in the policy too, but buyers must check that these extensions are in place."
Palmer advises buyers to ensure they are getting the best premium and cover. "In our experience through extensive supplier comparisons and reviews, clients can potentially save thousands, or tens of thousands of rands, or even halve their monthly premium, even while providing them with additional coverage not previously included in their old policy."
Casper explained that, in one case, a building was covered against fire and perils, but this was not sufficient enough. "We covered fire and perils, but expanded the policy to include theft, loss of rent, glass, public liability, subsidence and landslip, and accidental damage. We further enhanced the business' cover, at the same premium level, to cover the office contents, stock, fixtures and fittings, business interruption, accidental damage, public liability - inclusive of products liability."
Palmer said that brokers and property lenders should be in the position adequately to gauge what their clients' needs are and, where possible, provide the buyer with the relevant assistance. "Property professionals work together as there are a number of factors that need to be considered when purchasing property. Industry professionals need to look at what the client requires and, where possible, advise them adequately and point them in the right direction when advice, finance, insurance solutions and valuations are required," Palmer concluded.
