Shiabud – what does it mean and how does it affect your insurance policy?
By Danny Newman, Branch Manager – Beit Shemesh, Goldfus Insurance
When considering a large purchase, many people will turn to the banks for a loan. Most banks offer a range of loans, ranging from “all purpose” loans to specific loans for a particular purpose. Generally speaking, when it comes to a specific loan, such as for a mortgage or car, the banks often require an insurance policy with a lien (shiabud) to the bank.
What is a lien?
In insurance terms, a lien, or shiabud, is a form of security on a specific item or property that will compensate the lender (i.e. the bank or other financing institutions) should there be damage to the property insured by the policy.
What does this mean about my options related to the level of coverage?
Since the lender who requires the lien will want to be compensated for the portion of the loan in the event of significant damage or total loss, they require a policy that will be beneficial to their needs.
The most common policies that the banks demand are:
1. Comprehensive Car Insurance: When it comes to car insurance, Bituach Makif or comprehensive insurance is the only policy that covers total loss of a vehicle. As a result, the lender will require that the individual purchase a comprehensive car insurance policy with a lien connected to the lender. Although there are cheaper (3rd Party) policies available for the purchaser to choose from, the lender will still demand that a comprehensive car insurance policy be put in place.
2. Structure Insurance: The lender demands on structure insurance can sometimes work in the opposite way to the requirements on car insurance policies.
Essentially, there are two main types of structure insurance:
a) Rebuild value insurance covers the cost of rebuilding the structure (based on the size of the property and cost to rebuild per square metre) in the event of total damage giving you the ability to rebuild your structure on the property/land that you already own.
b) Market value insurance covers the structure according to the market value at the time the policy is set in place, taking into consideration the land value.
As the lender usually looks out for their own interests, they often only require a policy (usually a rebuild value policy) that covers the lender’s vested interest and not necessarily the true or full value of the property. With two types of structure insurance policies available, the individual must at the very least cover the lender’s requirements but by doing so, they may not be adequately insured.
For example, a person may have a mortgage of 500,000 NIS on a property with a rebuild value of 600,000 NIS. Following renovations, the true rebuild value of the property is 750,000 NIS. In this scenario, the lender may only require a basic policy covering an insured sum of 600,000 NIS, the value of the original rebuild value. The purchaser needs to be aware though that this leaves him in a state of under insurance in the event of a claim on the policy, in this case, for 150,000 NIS.
Although the lender will not object to a more correct and comprehensive structure insurance policy, they will not insist on it, as long as their investment is protected. Furthermore, since the lender is mainly concerned about the structure itself, they will demand that the policy covers water damage and earthquake cover, however they do not require 3rd party liability cover as that has little to no implication on them. This omission can also have repercussions for the purchaser at a later stage in the event of a claim, such as a burst pipe that causes damage to the neighbour’s apartment.
The purchaser needs to be aware of these factors when considering the insurance options, particularly when seeking quotes from an insurance provider connected to the bank, who may have the best interests of the bank as paramount, without explaining the implications of a less comprehensive policy to the potential policyholder.
How long must a lien be registered on the policy for?
A lien is required on the insurance policy for the duration of the loan or until the lender gives approval to remove it. During that time, the insurance policy must adhere to the requirements of the lender.
As both structure insurance and car insurance policies often renew annually, the new policy must be sent to the lender each year. This will be arranged by your insurance agency.
Before cancelling an existing policy, the insured must either present a new policy showing lien to the lender; or a letter of approval from the lender allowing for the policy to be cancelled.
While the lenders may appear to be forcing an individual to protect themselves by purchasing an insurance policy, liens are set in place to protect the lender. If a policy is required in any case, make sure to explore all the options available to create a correct and comprehensive policy, that does not only satisfy the demands of the lender, but that also fully protects you as the policyholder.
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