Saturday, October 18, 2014

Fire Insurance - The Common mistakes

There are two common mistakes in which money is wasted on insurance to protect your home — 
1. over-insuring and 
2. selecting the wrong type of policy. 

Many people make one or both mistakes.

The question that begs an answer from the insurance agent or the insurer is how to determine the sum insured for the house.
Very often they do not give a direct answer or a formula to calculate to avoid committing themselves and getting the blame when things go wrong in future. Their usual advice is to insure the house according to the market value of the property.
Does it mean that a standard 22’ x 75’ double-storey house valued at RM1,000,000 should be insured for that sum?
Over-insurance is not worth it
Even if the owner insures his house for RM1,000,000, the insurance company will not pay that amount to the insured in the event the house is totally destroyed by fire. Surprised?
That is because the sum insured also includes the value of the land on which the building sits and land cannot be destroyed by fire — only the building and its contents can be destroyed. Earthquake, soil erosion and land subsidence, however, can destroy the land.
Most likely, the insurer will pay the cost of replacement or reconstruction of the house. Currently, it costs about RM350,000 to build this type of house with standard finishings.
Therefore, the sum insured should be a little above this amount, say, RM400,000, to include incidental costs such as architect’s fees and removal of debris. Any amount above this figure is superfluous and wasteful.
Just by understanding how the insurance companies assess claims and insure accordingly, the premium will reduce by 60%.
Again, don’t expect the insurer to pay RM400,000 if the house is burnt — only the damaged parts will be assessed and compensated.
Generally, the amount to be insured can be determined by multiplying the built-up area by the cost of construction.
After consulting a reputable architect and a friend who is a property developer, I arrived at the estimated costs of constructing different types of houses — 
  1. RM180 psf of built-up area for double-storey houses, 
  2. RM350 psf for bungalow with standard finishing, and 
  3. RM600 to RM700 psf for bungalow with high-quality finishings.

While over-insuring is wasteful, under-insuring will subject the insured to bear a proportionate amount of the loss because he is deemed to be the insurer of the shortfall in the sum insured.
So, be very careful when deciding the appropriate amount.
Choose your coverage
The other common mistake is selecting the wrong type of policy.
There are two types of policies to cover residential properties — 
  1. fire insurance, and 
  2. houseowner insurance.

The former offers basic coverage against fire, lighting and explosions and the latter has more comprehensive protection against these perils and others including windstorm, tempest, earthquake, volcanic eruption, flood, loss caused by aircraft, explosion, road vehicles and animals, bursting or overflowing of water tank or pipes and electrical installations.
As we know, houseowner insurance costs a lot more than fire insurance. For a sum insured of RM400,000, the premiums on houseowner and fire insurance are RM464 and RM248 respectively.
There is a saving of RM216, or 46.5%, if only fire insurance is chosen.
If it costs so much less to buy fire insurance, why are so many insured under houseowner insurance?
Often, those insured did not select houseowner insurance but the banks that granted them the mortgage loans did it for them, without giving them a choice.
In fact, most mortgage loan agreements have a clause requiring the borrower, usually the insured, to buy fire insurance on the mortgaged property, failing which the bank is authorised to buy it on the borrower’s behalf and charge the premium to him.
Banks take the liberty to buy houseowner policy which offers more comprehensive coverage at much higher premiums to safeguard their own interests as well as to earn a higher commission from the insurance companies.
If the borrower decides that fire insurance is sufficient, he can instruct the insurance company to cover his property with only fire insurance.
I must add that each owner opting for fire insurance must carefully consider the various risks his property may be exposed to and, if necessary, extend the policy to cover perils or hazards like flood and earthquake by paying additional premiums.
Generally, for landed properties located on flat land away from rivers, ponds or slopes, fire insurance with RSMD (riot, strike and malicious damage) extension is sufficient.
Substantial savings
Correcting these two mistakes brings substantial savings in premiums. A houseowner policy with a sum insured of RM1,000,000 costs RM1,160. Assuming the owner has carefully analysed the risks and decided that a fire policy of RM400,000 is sufficient, the premium is only RM216. He will save RM944 every year by doing a little homework. Naturally, these savings will multiply if he has more than one property.
If the house has been renovated or extended, the cost can be added to the sum insured. It is prudent to keep the building plans, quotations, receipts and photos of the renovated areas to support a claim if the unfortunate need arises in the future.
Furniture, fixtures, home appliances, electronic equipment, personal effects, jewelries can also be insured under house-holder insurance, or under fire insurance (contents section).
The above tips will help anyone to review their property insurance and make adjustments if necessary. In doing so, a lot of money will be saved in the years to come.
About the Author
Chermaine Poo is a chartered accountant turned actress, TV host and professional emcee. If you have questions on money matters, send her an email at Follow her on social media at, and



17 September 2014

1    Background
In Malaysia, the sum Insured for a basic fire policy is calculated based on the cost of rebuilding/reconstructing the building in the event of a total loss to its current state (excluding the cost of land).  This is however subject to the terms and conditions of the Malaysian Fire Tariff.
2     Property under Financing
If the property is under finance, the need to insure the property is one of the requirements under the loan agreement and will be arranged by the Financial Institution (FI) to protect and safeguard its financial interest on the mortgaged property. Consumers are also provided the option to self arrange the fire insurance with the request for all policy documentation to be provided to the FI for records on an annual basis.  It is important, therefore, that the property owner or borrower understands the requirements stated in his/her loan agreement.
 3     What is the appropriate sum to be insured?  What factors should be considered?
PIAM would strongly advise  property owners to discuss with their FI on the appropriate sum to be insured taking into account the current rebuilding/reconstructing costs  of their property (excluding the cost of land) to ensure adequate coverage.
Property owners should be aware that raw materials and labor costs have gone up in recent years and if renovations have been done to the property, the sum insured for the fire insurance coverage may not be adequate as of today.  It is also important to factor in the impact of inflation.  It is PIAM’s recommendation to property owners to obtain a valuation report of their property from an accredited quantity surveyor at least once in every 3 years to establish the rebuilding/reconstructing cost of their property and update the actual sum insured to their FI or insurance company.
4      What happens when the full loan is disbursed?
For all mortgaged property, upon vacant possession, the FI based on the insurance requirement in the loan agreement will determine the sum insured for the fire insurance and arrange for immediate protection by the insurance company to safeguard the interests of both parties. The sum insured is related to the amount of loan taken.  It is a common practice that the cost of the land is excluded.
Upon receipt of the policy document from the insurance company, property owners should review and advise the insurance company of any amendments; including to increase or reduce the sum insured where required.
5       How is the premium collected from the property owners?
For the convenience of all property owners and to enhance operational efficiency the premium due is debited to the loan account after receiving the billing transaction from the insurance company. Consumers are made aware of this transaction with advice to remit payment to their loan account for this premium.
In view of Premium Warranty condition in the standard fire insurance policy which states that the contract is automatically cancelled for non-receipt of premiums within sixty (60) days from the inception date of the policy, this operational process between the FI and the insurance company will ensure continuity/validity in the fire insurance coverage.
Property owners need to understand the fire insurance requirement and its significance on their property; where the main objective for immediate arrangement and continuity of insurance cover is to protect the interest of both property owners and the FI.
6      Need for Consumer Education – what consumers have to do ?
There is a need for consumer education at the national level and raising awareness of property owners on their responsibilities and obligations.  PIAM as a trade association for general insurance companies will drive efforts in this regard. 
On their part consumers have to review the policy insurance document received, to regularly determine the correct amount to be insured for their property and to ensure there is no under-insurance or over-insurance.  In addition they should provide any other amendment/feedback/option to the FI and insurance company; where applicable and also to submit complaints, if any to the parties highlighted in all policy documents.    
FIs must be consistent in allowing the option to property owners to arrange self insurance or/and to determine the correct sum insured based on acceptable facts of valuation or/and open to relevant feedback received.