Home Insurance: Should you get your flat insured at Market Value or Reinstatement Value?

Home Insurance: The most common way to get the structure of one’s house insured is on the Reinstatement Value basis.

It is often said that home is where the heart is. And why not? One’s home, after all, is usually the most prized possession in one’s life. Therefore, like your family members, it is also important to protect your home, especially from natural calamities such as earthquakes, cyclones and floods. And what a better way to protect it than taking a home insurance cover?

Before going into detail, however, let us take a look at what is home insurance.

What is home insurance?

Home insurance covers provide financial indemnity to your home and its contents against physical damage and destruction to the property due to defined perils, including fire, lightning, etc. It also provides protection against earthquake, storm, tempest, flood and inundation (STFI perils), among others.

Why is home insurance needed? What does it cover?

For most people, their home tends to be one of their major assets and many have taken years to save money to build up all the interiors and their personal contents. Thus, “if a home gets damaged or destroyed in a natural or man-made disaster, then it won’t only be emotionally damaging for the concerned person, but financially devastating too,” says Pavanjit Singh Dhingra, Director, Prudent Insurance Brokers.

Thankfully, there are home insurance covers available in the market today to protect one’s home from natural or man-made disasters. Overall, home insurance provides a comprehensive coverage for losses/damages to your house as well as its contents or both.” These include (1) Standard Fire & Special Perils Cover, (2) Burglary/Theft Cover, (3) Electronic Equipment Insurance, (4) Breakdown of Domestic Appliances Cover, (5) Portable Equipment Insurance Cover, (6) Jewellery and Valuables Cover, (7) Art and Painting Cover, (8) Personal Accident Cover, (9) Public Liability Cover, and (10) Baggage Cover, among others.

Different Types of Homeowners Coverage

There are different types of home insurance coverage available in the market today which cover a house and its contents depending on their value.

1. Reinstatement Value insurance: The most common way to get the structure of one’s house insured is on the Reinstatement Value basis. A home’s Reinstatement Value is calculated on the basis of the built-up area and the present day cost of construction in the locality as decided by the insurer.

“For a Reinstatement Cover, the insurance company pays the actual cost of construction at the time of claim. This cost of construction can be lesser than the Sum Insured of the policy at times, but cannot exceed the Sum Insured of the policy,” says Sanjay Singh Chauhan, Business Head – SME & Home Insurance, Policybazaar.com.

2. Market Value (Indemnity Value) insurance: In the event of a loss in the case of Market Value or Indemnity Value, depreciation is levied on the asset depending on its age. “Under this method, the insured is not paid the amount sufficient to reinstate the assets,” says Dhingra.

Example:

3. Agreed Value insurance: Most people are aware about the Market Value and Reinstatement Value. However, there is another type of home insurance cover available in the market today – Agreed Value insurance. Getting your home insured at Agreed Value means the loss will be settled by the insurer on the value of the property or content agreed by the insurer at the time of purchasing the insurance policy.

Market Value Vs Reinstatement Value Vs Agreed Value: Which coverage is most suitable for you?

Thus, while some home insurance products cover the market value of one’s property, some provide coverage on the reinstatement basis and some on the agreed value basis. Now out of these three types of coverage, which one will be the most suitable for, say, someone living in an apartment?

Industry experts say that for someone living in an apartment in a multi-storey building, an Agreed Value basis insurance policy can be a better option. That is because in the event of any loss, under Reinstatement Value, the insurance company will pay the cost of reinstatement of the property, but the same depends on various factors.

“For instance, in a multi-storey building, until the entire society does not go for reconstruction, the individual flat cannot be reinstated and as such the claim will not get paid. However, in case of Agreed Value insurance, the insurance company pays the sum insured agreed at the time of taking the insurance policy as soon as admissibility of the claim is confirmed and the customer can purchase a new flat immediately. In terms of the Indemnity (Market Value) Basis policy, the insured will get compensation as per the market value of the house, but after a deduction of depreciation or wear and tear,” says Deepak Dhar, Head-Specialty Lines and Marine Underwriting, Bajaj Allianz General Insurance.

Dhingra says, “The suitability of a policy varies from person to person and circumstances. However, Agreed Value is a good option for a flat/multistory buildings as it provides the option for the settlement of a claim on Reinstatement Value basis or Agreed Value basis.”

Market Value in insurance means the new replacement value minus depreciation, whereas Agreed Value means agreed value irrespective of the Market Value or Reinstatement Value. So, “even if you are taking a long-term Agreed Value policy for 5 years, the claim will be settled as per the Agreed Value basis and depreciation will not be applied,” says Dhingra.

The Agreed Value option is also better because one can take the Sum Insured up to the actual market value of the property. Upon claim, the insurance company will pay up to the Sum Insured, and the customer can decide if they want to construct the affected property or move to a different location.

“For single flat owners in a multi-story building, thus, Agreed Value is a suggested option. That is because if a multi-story building is affected, the construction of, say, the 1st floor cannot start until the ground or basement is completed. In such a scenario, the 1st and the above floor owners will have to wait. However, if they have an Agreed Value insurance cover, they can hand over the property to the insurer and move to a different property with the claim money,” informs Chauhan of Policybazaar.com.

What to do?

Out of the three options, thus, Agreed Value insurance may be the most suitable option for someone living in a multi-story building, while those living in stand-alone houses can go for a Market Value or Reinstatement Value cover, depending on their need. However, before opting for a home insurance cover, read its terms and conditions carefully. Also, don’t under-insure your home as in that case you may get penalised by the insurer.