Building Insurance Coverage

We can say that most people take out an insurance to insure their building in Cyprus, which usually covers various events, mainly fire, earthquake, burst pipes, flooding, acts of God etc. One cannot be too sure where the cause of damage will come from, so, it is our opinion that a building should be covered for all eventualities, even if this has a slightly higher insurance cost. Special care is needed however when signing the insurance policy for the so called “exclusion clauses”.

One such exclusion clause is that if a building is damaged as a result of a bush fire, there is no cover (unless you so stipulate). Other clauses which are of a special interest for buildings, is that if a building is not occupied for a period of 30 days continuously, then again you will find that you are not covered (practically all holiday homes). So and we know how difficult and incomprehensible is an insurance policy to understand, pay special attention to the exclusion clauses and insists on an all risks and eventualities policy.

Some insurance companies stipulate that they cover the replacement cost of the building or they cover the value of the building. The difference is that if for example you have a building, which has no value as such, e.g. because it is very old and/or because the land value is so high that the buildings have no added value as such, you will find that the insurance co will not pay. If for example you own an old house on a Makarios Avenue plot with €2.0 mil. development value and your building is damaged, then the insurance company can claim that since the value of the property is found in the land, there is no damage payable, despite the fact that the insurance company was happy for you to insure the building at the value which you stipulate. However, even in this example with the €2.0 mil. plot, if the only thing you want is to have the money to rebuild it, you will be uninsured. So in this case you should take out an insurance based on the replacement cost. The insurance company will pay only if and when you actually undertake to rebuild the house. So do not expect that you can keep your €2.0 mil. plot and get the replacement cost of your house without rebuild it. If however you do not insure the value of this house, but you insure its replacement cost, then the insurance company is liable to cover you for the rebuild.

Also you will find on many occasions, that the replacement cost is higher than the market value of the building. If we are to take an aged apartment of a low quality and limited demand, having a market/sales value of (say 100 sq.mts.) of €90.000, the replacement cost might be more than €105.000. So be very careful and we suggest you insure your building on a replacement cost basis, i.e. the cost of demolition, clearance, new design and permit costs, construction building costs, V.A.T. etc. As an indication of the cost nowadays for an ordinary apartment, the replacement cost is approximately €1100/sq.m. Replacement cost means rebuilding the property as new, but with the use of the materials/quality that the building has. So you cannot claim the sum to replace your building with granite floors, since what you have in your house are mosaic tiles, outdated kitchen and wooden windows etc. The insurance company must cover the cost of rebuilding based on the same, or as near the same materials/quality. Care is needed however since if in your effort to reduce the insurance bill, you estimate a replacement cost lower than the actual, then the insurance company will pay the analogous reduced amount. (If your house has a replacement cost of €100.000 and your insurance is for €70.000, the insurance company will pay only 70% of the replacement cost – If you over estimate your property, the insurance company will only pay the actual amount as a maximum).

Another problem that you must consider is that over and above the replacement cost of your building, you must take into account also the common areas, such as basements, parking, swimming pool, cost of clearance etc. For this reason it is recommended that in the case of a building/project which comprises numerous units, a comprehensive assessment is made at regular intervals (say every 2-3 years), which will cover the units themselves and the common areas as well. Bearing in mind that building costs increase by around 7%-10% p.a., this is highly recommended.

Another problem, which is quite difficult to solve, is what happens if in a comprehensive project e.g. a block of flats of 10 apartments, 8 units are fully covered, whereas the other two are either under insured or have no insurance at all! In such event the project cannot be rebuilt (since the replacement cost is paid when you actually replace the property, what is the legal situation in this case?). For this reason for such projects, which comprise more than one holding, a comprehensive insurance should be undertaken and paid as part of the common expenses, so as to reduce the risk described above.

Of course insurance claims do not happen often and for this reason not many people have an adequate insurance cover or the above details are not given proper attention as a priority. It is strange, since, we are all happy to pay €300.000 to buy an apartment, but we become quite difficult when paying an amount of money to protect this investment.

What is even more irritating, is that, should you obtain a loan from a bank and the bank itself insures the building and suddenly the bank/insurance has to pay up the insurance amount, if you are under insured, then you must pay the insurance/bank the difference!! So it is a crazy situation for all concerned since banks by using their own insurance company, bear no responsibility.

As far as the individual buildings are concerned, it is the responsibility of each owner to cover his property adequately and to seek explanations from the insurance company and seek some form of a “fully comprehensive insurance – all risks”. For these reasons, but more importantly in case of joint ownership you must insist on a comprehensive insurance for the whole project, including roads etc, which should be updated every 2-3 years getting a new valuation by a qualified surveyor and do not base your estimate on the historic cost of the initial purchase. – For those people who think that they will take an additional insurance, they will not get a “double” payment, since an insurance payment is paid only once, up to the total “proper” amount.