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by Creig Kinch, Senior Associate, Clarke Gittens Farmer
In Barbados there are a number of laws which affect the insurance of real estate or property. This article, while not exhaustive, will discuss how the law governing property insurance impacts on the following:
- what and when to insure;
- how much to insure for;
- what an insurer will pay out under a policy;
- condominium insurance options; and
- a lender’s rights under a policy of insurance.
For practical and detailed advice on insuring property you should consult a qualified and competent property insurance agent or broker.
1. What and when to insure
When determining what to insure, a real estate investor should bear in mind that in Barbados you cannot insure land. You can only take out a property insurance policy to cover a building, its fixtures and fittings and/or its contents.
As the risk passes to a purchaser from the date the purchaser enters the agreement for sale, a prudent purchaser should not wait until the sale has been concluded to insure the property. A purchaser should take the simple precaution of insuring the property against loss from the date he enters into the agreement for sale.
The Property Act makes provision for a purchaser to have the benefit of any insurance money payable to the vendor after the date of contract in respect of any damage to or destruction of the property, provided:
- there is no contrary stipulation in the contract between the parties; and
- the purchaser pays a proportionate part of the premium from the date of contract.
Despite this provision, it is still advisable for a purchaser take out a separate insurance policy, as the Property Act does not require the vendor to maintain the insurance or inform the purchaser that it has lapsed. Further, the policy might be voidable at the option of the insurance company or the sum insured may be insufficient to afford the purchaser adequate cover.
The insurance of buildings being constructed is usually arranged under a Contract Works Policy (sometimes called a Contractors’ All Risks Policy). The interest of the main contractor, the owner and others may be insured by one policy or there may be separate insurances held by the various parties including sub-contractors.
2. How much to insure for
Prudent investors want to know that their interest in property is fully protected and therefore should seek to insure property for its full insurable value. Most lenders taking a mortgage over the property will require that the property be insured for a sum not less than the amount they have lent. However, even where a lender only requires the property to be insured for the sum lent, the property owner should still seek to insure the property for its full insurable value to avoid underinsuring the property and the effect of averaging discussed below.
Property owners should have regular valuations of the property done as the value of the property may change from year to year. This will help the owner determine the true value of the property and avoid over or under insuring the property. This is particularly relevant where the owner has mortgaged the property and has covenanted to keep the property insured for its full replacement value at all times. If the owner fails to keep the property insured for it full replacement value he will be in breach of the mortgage and the lender may be able to call in the loan.
3. What an insurer will pay out under a policy
What an insurer will pay out under a policy depends on the type of policy and the terms and conditions of the policy. Most property insurance policies are indemnity policies and an insurer is only required to pay for the loss actually suffered by the policy owner up to the amount specified in the policy. A property owner cannot recover more than the specified amount insured on the property. Neither can an owner claim consequential loss like loss of rent, loss of occupancy, loss of business profits, wages of employees or workmen rendered idle unless the policy stipulates otherwise. Further, where a property owner has more than one policy of insurance over the same property covering the same risk, that owner cannot recover more than the actual loss he suffered. Where that owner elects to recover under one policy, that insurer can claim a contribution from the other insurers.
The insurer’s liability in respect of a property insurance claim is measured by the depreciation in the market value of the property; and in any event it will not exceed either:
- the amount insured; or
- the insurable interest of the property owner.
The liability of the insurer in respect of damaged property is not necessarily the same as the cost of reinstating the property, even where the insurer has an option to reinstate. The proper measure of what an insurer will pay out is the difference between the value of the undamaged property before the event which caused the damage and the value of the damaged property after the event which led to the damage. The undamaged value before this event is based on the market value immediately before the event which led to the damage. The property owner is not entitled to take the cost of reconstruction as conclusive evidence of the value of the property at the time of the event that caused the damage. However, the cost of reconstruction may be used as evidence of the undamaged market value immediately before the event which led to the damage. If the cost of reconstruction is used to value the property before damage, such cost will be subject to abatement in respect of:
- any sum paid for reconstruction work which is more than its value;
- any decrease in market value of the property since the time of purchase; or
- any wear and tear or damage other than that insured against which may have depreciated the value of the property.
Often older properties are not as valuable on the market as new properties. When older properties are destroyed the insured will have to construct a new property. In such a case he will only be entitled to claim the value of the older property.
Conversely, where the property is insured for less than its full insurable value and a property owner suffers partial loss an insurer may rely on the principle of averaging. According to this principle, the property owner will only recover that proportion of the loss which the sum insured bears to the value of the property. The property owner is deemed to be his own insurer with respect to the balance. For example, if a house worth $300,000.00 is only insured for $200,000.00, in accordance with the principle of averaging, the property owner will be entitled to only two thirds of any partial loss.
Generally, owners should also note that some policies of insurance provide for certain deductibles to be taken from the proceeds of insurance before it is paid out. These deductibles will further reduce the sum an insured receives under the policy.
As mentioned above, property insurance policies are renewable from year to year. Each renewable term of insurance is a distinct risk. The insurer undertakes to make good all loss or damage up to the specified amount during each current year of the insurance. So for example, if the property is damaged or destroyed by a fire and payment is made under the policy, the insurer is only liable for the balance of the sum insured for any subsequent loss during the same year of insurance. When the policy is renewed for another year, the insurer again becomes liable for the loss or damage up to the specified amount.
Property owners should note that some insurance policies contain a reinstatement clause. This clause gives the insurer an option either to pay moneys out under the policy for the loss or damage to the property or to restore the damaged property. If the insurer chooses to restore the property, the insurer must provide adequate notice to the property owner of its intention to do this and such notice is to be in accordance with the provisions of the policy document. Where an insurer elects to pay moneys out under the policy it cannot afterwards change its mind and say it will reinstate.
4. Condominium Insurance Options
The Condominium Act requires the body corporate which runs the condominium complex to insure and keep insured the condominium building in a sum not less than its replacement value against fire, hurricane and sea wave. This insurance covers the cost of repairs or replacement of the building should it be damaged or destroyed. It does not usually cover internal damage to a unit or the unit owner’s contents, fixtures or fittings. The Condominium Act imposes a duty on the body corporate to repair or rebuild the building if damaged or destroyed where the damage sustained:
- renders less than 75% of the units in the building unfit for occupation;
- renders more than 75% of the units unfit for occupation and 90% of the unit owners have within 60 days of the event causing the damage resolved that the building should be reconstructed.
Where the body corporate is under a duty to repair or rebuild, the Condominium Act requires that the proceeds of insurance be used to repair or reconstruct the building. Where the body corporate is not under a duty to repair, the unit owners will be entitled to a proportionate shared of the proceeds.
Additionally, the Condominium Act makes provision for a unit owner who has mortgaged his unit to a lender to take out an insurance policy in a sum equal to the amount secured by the mortgage. Subject to the terms of the policy, in the event of damage to the unit the insurer will pay to the lender (once its interest is noted on the policy):
- the value of the policy;
- the amount of the loss; or
- the amount that would discharge the mortgage
whichever is the least. Once the insurer has paid out under this policy and the payout has fully satisfied the amount secured, the Condominium Act permits the insurer to take an assignment of the mortgage. The Condominium Act also permits that if the payout does not fully satisfy the amount secured, the insurer can take a second mortgage over the property to secure the sum paid out.
Where the condominium building is uninsured or underinsured, the Condominium Act permits the unit owner to effect a policy in respect of any damage to his unit. The sum of insurance should be equal to the replacement value of the unit less the sum representing the amount which his unit is insured under any policy of insurance on the building.
In relation to the additional policies mentioned above, the Condominium Act states that where an owner takes out:
- insurance over his unit where the property is mortgaged; or
- insurance over his unit where the building is uninsured or insured for less than the insurable value;
these policies shall not be taken in contribution to the body corporate’s policy in respect of the building but can be taken in contribution with each other where they overlap.
As most insurance policies taken out by a condominium body corporate do not cover contents, fixtures and fittings of the unit, an owner can also take out an insurance policy over these items. It should be noted that this policy would cover internal damage to the unit.
5. Lender’s Rights
Lenders taking a charge over buildings normally require that the buildings be insured and that their interest be noted on the policy. Where a lender’s interest is noted on a policy of insurance that lender is entitled to receipt of the insurance proceeds in the event of damage or destruction to the premises.
Property owners should note that some mortgages give lenders the option of applying insurance moneys in repairing or reconstructing the property. The decision as to how the moneys are applied is not left up to the owner.
In order to protect their interest under the policy, lenders require yearly evidence that the policy has been renewed and that all premiums are paid up. Failure to provide this evidence can lead to a breach of the mortgage and can entitle a lender to call in its loan. Lenders also normally reserve the right to pay for renewals of the policy and add such sums paid to the mortgage debt.
With the advice of a competent attorney and insurance agent or broker, a property owner can choose the right insurance policy to protect his or her investment. In choosing his or her policy, a property owner should seek to insure his building, its fittings and fixtures and/or its contents for their full insurable value to ensure that should it be damaged or destroyed he receives the full amount possible under his policy.