"If I had my way I would write the word 'Insure' upon every door of every cottage …, because I am convinced that with sacrifices which are inconceivably small, families and estates can be protected against catastrophes which would otherwise smash them up for ever.” These are the words of Winston Churchill, words, which still ring true nowadays. So here is a general outline of the main aspects to be considered when seeking a property insurance coverage.
LET’S START WITH THE JARGON
Risk: it designates the property to be insured, whether it is the house you are in the process of building, the one you live in, the one you rent, or the one you invest in.
Damages: the damages that can be possibly done to your property are all here deemed accidental or due to theft. These are the only ones an insurance company is likely to agree to cover of course.
Quote: it is the form that is used to compile all the information needed to establish the best insurance package for each considered risk.
Insurance policy: it is the contract agreed by both parties: the insurance subscriber and the insurance company. It defines the specifics of the cover and it stipulates the costs and conditions of this cover.
Premium: it represents the cost of the insurance policy. It is paid once yearly or typically by monthly installments.
Franchise: it represents the value of damages that an insurance subscriber contractually agrees to pay. In such a case, the insurance company covers only the costs of damages exceeding this franchise.
Civil responsibility: it reflects the obligation that one has to repair the prejudice that he/she caused by virtue of the legislation or of a contractual responsibility.
THE DIFFERENT TYPES OF INSURANCE CONTRACTS
Your profile, whether your are an investor, an owner-occupier or a tenant, can dictate the type of cover you contract, whereas the type of risk, house or apartment, that you insure, can dictate the conditions through which you contract your insurance.
The insurance contracted by the property owner-occupier
The owner-occupier protects his/her property by protecting all together the building (the construction including the internal fixtures and fittings) and the contents (the furniture and the personal belongings). The cover may generally include civil responsibility - building.
· When the risk is a house: the contract is drawn directly between the insurance company and the insured party.
· When the risk is an apartment in an apartment block, a contract for the entire building is drawn on behalf of each of the insured parties through the management company of the apartment block.
All the owners jointly agree on nominating one company to insure them all at once. The insurance protects each individual risk against accidental damages towards the building’s common and private areas, to the exception of the personal contents.
The premium are paid by the management company and reallocated as any other common charges to each owner, based on their share of the building. If one owner feels the level of insurance is insufficient, it can usually be topped up and added to the individual insurance for personal contents, which needs to be contracted separately by each owner.
The insurance contracted by the tenant:
Contracting an insurance is not mandatory by law but it is often imposed by the rental contract. It reflects the responsibility implied in contracting the lease and taking care of someone else’s asset. The tenant is then asked to get insurance for the property internal fittings and contents (furniture and personal contents) and against civil liability - building.
Tenants’ contracts are often standard contracts, which are likely to cover the risk at least against accidental damages created by fire, water leakage, glass breakage, theft as well as the cover for civil responsibility - building.
When there are several tenants, the responsibility is allocated proportionally to the value of the occupied space.
The insurance policy is contracted in the same fashion whether the rented property is a house or an apartment; in both case the contract is drawn between the subscriber and the insurance company.
The insurance contracted by the private investor:
The investor can contract an insurance to protect the building and some of the contents, at least the fixtures and fittings in the kitchen and the bathrooms. A cover for civil responsibility - building could be included.
At some point in time investors with property portfolios decide to rent some of their properties out. A cover against lost rental income may also be contracted.
· When the investment property is a house, the contract is drawn directly between the subscriber and the insurance company.
· When it is an apartment, the contract is drawn through the management company on behalf of all the owners, regardless of their status: owner-occupier or investor. It generally covers protection for both private space and common areas. The costs of the insurance policy are reallocated to each proprietary according their share of the building.
WHAT THE INSURANCE CONTRACT PROTECTS YOU AGAINST
You can require an insurance protection for everything you own and for every imaginable situation. We are below listing the most common covers that you are likely to come across when investigating for yourself.
Most common types of cover
Items 1, 2, 3, 4, 5 and 6 are covers that you could find in most standard insurance packages. It is however very important to review the small print under each of the headings.
For each of them you usually find instances that are covered and others, which are not covered unless specifically requested (and at an extra cost). You also have a list of situations that are just not covered. So when you think a cover against water damage protects you no matter what, it could protect you against a burst pipe but not for damages created by condensation.
Some headings are also misleading; a protection against lightning could be found under the “fire” heading and not under that of “forces of nature”
6 Civil responsibility
Civil responsibility is also a recurrent item in most standard insurance packages and for the purpose of clarity, we need to distinguish between the two types that you will come across:
· Civil Responsibility - Family: as the head of the family unit, you are responsible for the damages – physical and material - created by your negligence or by that of a member of your family (pets included). This cover is irrelevant of your housing situation and of your property investment portfolio.
· Civil Responsibilty – Building: not to be confused with the above. As the owner and as the occupier of a building, you are responsible for the damages – physical and material -, which may be linked back to this building. The contents of the cover vary with the type of building and with its components, for example, whether there is a lift in it, whether there are some outdoor structures such as a swimming pool, etc.
7 Building construction in progress:
When a building is under construction, all tradesmen should be covered by their own professional insurance. The person in charge of the overall project should ensure that it is the case and that each individual contracts put together cover all the possible future accidental situations, which may arise from working on the building site, including theft.
However, the client, commissioning the project, should contract his/her own insurance so as to guarantee personal physical protection when visiting the site.
When the construction project is funded by a bank loan, the bank also requires that the client insures the building against the possible threats of fire and forces of nature.
This contract is then converted into an ordinary home insurance for owner-occupier or for investor, once the building is completed and ready to be occupied.
8 Remaining due balance
When contracting a mortgage, the bank, which grants the loan, requests for this loan to be insured by its beneficiary. The calculation of the insurance premium is based on the value of the mortgage, the repayment terms and the profile of the subscriber. It protects the banking institution against payment default.
9 Decennial building warranty & Two year building warranty:
They are insurance covers that are not subscribed to by the owner or the occupier of the property but by the builder/promoter building it. However they are the insurance policies that the property owner can benefit from if they are properly in place and if there is a defect in the construction, which is discovered after its completion.
The decennial warranty covers for defects affecting the stability and the structure of the building, such as roof, walls and openings. It is valid for 10 years after the completion of the construction.
The two-year warranty is the cover for the defects affecting smaller items as well as brought in pre-built elements such as the heating boiler and the electric shutters. It is valid for two years after the completion of the construction.
The policy must clearly list out how it categorises each building item.
10 Loss of rental income
As seen above, it is one insurance cover that a landlord can contract to secure that his/her rental income will keep on being received.
There are two instances when loss of rental income is envisaged:
- When the property is not rented out for a while, i.e. when the landlord is looking for a new tenant,
- When the current tenant has stopped paying rent.
THE MODALITIES OF THE INSURANCE CONTRACT
What to look for when subscribing an insurance contract
1 Get quotes: there are several dozen of insurance companies in Luxembourg (*) so competition is fierce. It gives you the opportunity to shop around and look for the package, which is also the most appropriate to your needs and your situation. Be sure to request first and in writing, a quote and not a contract. A contract could be implemented before you sign or pay anything however you do not want to lock yourself into a contract before you have had the time to decide whether or not it is the best one for you.
2 Assess how you can update a contract in view of potential future changes in your life. Contracts may run for a full year and may not be broken mid-year.
3 Check out how a claim would impact your policy and its future costs.
4 Make sure you know how to terminate a contract. We focus so much on entering one that we forget this equally important stage. You should be respectful of the notice of termination that you are asked to give. Most companies ask you to send a registered letter with confirmation of receipt. Make sure that you do indeed receive confirmation of receipt and that you do receive it within the appropriate time frame.
How to value the risk?
With regards to a building, the value usually considered is that of reconstruction. In the case of a building, the costs of reconstructing foundations and basement are included.
With regards to the house contents, you could elect an overall amount, which then would be sufficiently high so as to cover replacement costs in case you loose them all. It saves you listing out tediously all your belongings.
For specified items, such as art pieces, wine collection, a professional appraisal, which could be carried out by the insurance company itself, may be required and it is usually the object of a particular consideration in the contract.
The evaluation of the risk should be different whether you are an owner-occupier, a tenant or an investor.
Making a claim:
· Correlating items: clarity is a key element here: the claimant must prove the three interlinked elements, which activates the civil responsibility or other aspects of the insurance cover:
o There must be a clearly defined initial act,
o The damage must be real,
o The correlation between the initial act and the damages must be indisputable.
· The presumption of responsibility: situations could become tricky when a property is owned by one person and rented by another. By default, the tenant is deemed responsible for all accidents unless he/she can prove his innocence, the owner does not have to prove anything.
3 types of circumstances can alleviate the responsibility of the tenant:
o Force majeure: nothing could be done to avoid the accident, not even the due diligence of the tenant,
o There is an identified construction default or a maintenance failure,
o The damages are the result of an accident propagating from a neighbouring property.
Generally the insurance contracts, which are subscribed to protect people (as opposed to material things), are the object of a tax rebate. This is the case of covers for civil responsibility.
The rebates are reflected in the annual fiscal return that is filled in by every person liable for tax in Luxembourg.
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This article is provided for information only and it is not meant for reliance of any type. Insurance contracts are specific and complicated and must be comprehensively reviewed by the subscriber and an expert insurance advisor to ensure that the cover adequately addresses the subscriber’s needs.