Mortgage Insurance – Is there more than one way of insuring structure?

Mortgage Insurance – Is there more than one way of insuring structure?

Contributers: Danny Newman, Ronen Goldman & Orit Touson

There are many steps to purchasing a property – especially if you need to take out a mortgage to do so. Some of us will choose to work with a mortgage broker, while others will take on the challenge alone. In the excitement of it all, many people rush over one of the most important elements – mortgage life insurance and structure insurance.

As this is something that banks often tell people about at the last minute, these insurances are often implemented in a hurry without really looking into the details of the policies being purchased or correct consideration of all the necessary elements. In this two part series we will explain about mortgage life insurance and structure insurance in Israel.

In this article we will be focusing on the key elements of structural insurance so you can be sure that you are putting a comprehensive policy in place.

Is there more than one way of insuring structure?

In essence, there are two ways of insuring structure: Rebuild Value Insurance and Market Value Insurance.

The banks usually only require the mortgage holder to purchase the rebuild value policy up to the bank’s commissioned appraised value. Often, this rebuilding value required by the bank may only cover the bank’s insurable interest, and may not fully cover the full value of the home or upgrades such as high level flooring, upgraded kitchens, central AC systems etc. It is still possible to purchase either more comprehensive rebuild value or market value insurance policies with a lien to the mortgage bank on the policy, to meet the bank’s requirements. Therefore it is important to understand the differences between the two options.

So what is the difference?

Rebuild Value Insurance covers the cost of rebuilding the structure (based on the size of the property) in the event of total damage, giving you the ability to rebuild your structure on the property/land that you already own. The disadvantage in insuring the Rebuilding Value, is that the rebuilding of the structure may be delayed or dependent on your neighbours’ ability to rebuild. While this is the basic level of cover required by the bank, it does not necessarily mean that it is the correct policy for you.

Market Value Insurance covers the land value in addition to the rebuild value. In the event of total damage, and if there is a delay in your ability to rebuild as defined in the policy, the insurance company pays you the land value of your property, giving you the ability to take the money from the claim and purchase another property at any location. The market value can be adjusted over time as the property increases or decreases in value. It is important to update your policy once every three years to make sure that the sums insured are a true reflection of the property value.

What about coverage for water damage?

Coverage for water damage is also a requirement by the mortgage bank, however like the structure insurance, the bank only requires the basic level of coverage offered – repairs by the plumbing service of the insurance company. While this is the cheapest option, the service is usually sub contracted to a plumbing company and it is not always guaranteed that you will receive the same level of service each time you need it. Other insurance policies are able to offer the option of “Prime Service” – a higher level of plumbing service, as well as the option of choosing to work with a plumber of your choice. While the latter is the most expensive option, it gives you the freedom to choose the plumber to repair water damage at your property.

Is third party liability coverage included in the policy too?

As opposed to the other two elements already discussed, the mortgage banks do not require that a structure insurance policy have third party liability coverage – this is essentially because it does not directly affect the bank. As such, policies via banks (unless through an agency they use) will not cover third party liability, which can put you at a serious disadvantage.

What is third party liability cover?

Third party liability cover protects the property owner in the event that damage caused to a neighbour’s structure originates from their property. One of the most common examples of this is a burst water pipe that originates from one apartment and the damage spreads to a neighbour’s apartment. The property owner of the apartment where the burst pipe originated will be able to claim on the third party liability coverage on his own policy, to compensate the damage caused to the neighbour’s property.

So how do I choose a policy?

The best way to choose the right policy for you is to understand the options and determine what is important to you. Just make sure that you have the essentials in place: structure insurance for the correct value; adequate water damage cover, third party liability cover and if relevant, the appropriate contents insurance that ought to be part of the same umbrella policy. If you have made the effort to purchase a new property, it is worth investing in a comprehensive insurance policy so that you can sleep peacefully in it at night.

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