Increased replacement values

In terms of legislation, “…trustees shall take steps to insure the buildings…to the full replacement value thereof…”  In addition to this obligation, legislation also states that “Any owner may…increase the replacement value of his unit, provided that such owner shall be liable for payment of the additional insurance premium…”

Why does the replacement value increase?

There are two main reasons why the replacement value of a unit would be increased over and above the replacement value, as follows:

1. An owner renovates their unit to such an extent that the basic replacement value becomes insufficient to replace the unit. For example, a unit was destroyed by fire, and the owner neglected to arrange for the insured value of his unit to be increased after extensive improvements were made to the unit. The insurer finds that the unit is under-insured, and in terms of the average clause contained in the insurance contract, the claim is settled for less than the actual repair costs. The owner will be unhappy at having to pay a huge amount of the claim himself.

2. When a mortgagee grants a bond on a unit, the mortgagee will request that the unit be insured for an amount, as required by the mortgagee. Legislation places an obligation on the trustees to provide the mortgagee with proof that a cession has been arranged in favour of the mortgagee to this effect. It is important to note that the trustees are not hereby guaranteeing that the value (as required by the mortgagee) will be paid out in the event of the unit being destroyed.

Explanation

While the first reason is clear in its intention that an owner be allowed to increase the replacement value on his unit, it is in terms of the second reason that intermediaries or insurers are often challenged.

In practice, it is not unusual to find that a mortgagee requires a replacement value to be confirmed, which is excessively more than the real and reasonable replacement value of the unit.  The implication is that the unit is over-insured and that the owner is paying an additional premium for something from which he or she will not benefit.

The unit owner invariably confronts either the intermediary or the insurer on the additional premium for the increased value. It is important to note that there is only one entity that may authorise the correction of such an over-valuation, and that is the mortgagee.  Therefore, it is a matter which can only be resolved between the owner and the mortgagee.