For the majority of people in the UK, the purchase of their house will be the largest purchase of their lifetime, and an asset which both they and the mortgage company will want insured in the event of any problems.   In summary there are two different types of insurance, building insurance and content insurance - with building insurance being mandatory and content insurance “optional” (although highly advisable). 

When you buy your property and take out a mortgage to cover the cost, as you would expect, the mortgage company will insist upon building insurance being taken out at the same time. This is because your home will be used as collateral for your mortgage and in the event of default of payment, your home will be sold, the mortgage company paid off and any excess or surplus funds taken care of at this point.  If something were to happen to the structure of your home then this collateral would be in effect worthless!

 

When you take out your mortgage you will be heavily advised by the mortgage company to take our their insurance, in tandem with your mortgage, although while this is not compulsory you may to be told this is.  You are quite within your rights to set-up your mortgage and arrange your own building insurance with another third party.  If you take this route you may well be charged a “switching” fee, which is in effect a penalty for arranging your insurance elsewhere, a charge which many deem to be unjust and something which the authorities are monitoring carefully - the mortgage industry is renowned for introducing “unjust charges”.

Do not be put off by the “switching” fee as you will often find that you can still make savings of up to 30% by looking elsewhere for your building insurance, exposing what has been a very lucrative exercise for mortgage companies who used to insist that their building insurance products were used with their mortgage services.

What are your covered for?

In effect building insurance covers the structure of your home together with an array of fixtures and fittings which all add value to the property, such as toilets, bathroom, kitchen and interior decorations.  The majority of building insurance polices will also cover the home owner against :-

• fire
• lightening
• explosions
• earthquakes
• storm damage
• flood damage
• aircraft (and objects falling from them)
• subsidence
• landslip
• vehicles colliding with your property
• animals causing damage to your property
• collapsing aerials
• leakage from your water system
• burst pipes
• heating system malfunctions
• damage due to riots
• malicious damage by third parties

As many homes have extended gardens nowadays with out buildings such as garages, sheds and greenhouses, the insurance industry have spotted a lucrative opening for further cover.  While traditional policies will usually cover these “unconnected” buildings, it is advisable that you check the small print to see that they are covered, without any clauses.

As the housing market has developed over the last 100 years we are also seeing other issues covered such as cost of alternative accommodation if you are unable to reside in your house for some reason, damage to pipes, underground cables, electricity supply, gas supply, oil, water or sewage, glass doors, windows, skylights and a very useful insurance against you being responsible for damage to neighbouring properties (even more essential where you live in a flat with possible neighbours above and below you!).

Points to look out for

The insurance industry is renowned for the hidden terms in the small print, terms which can often come back to haunt you in the event of an unfortunate situation.  It is there essential that you are aware of the excesses and exclusions :-

Excess

This is basically the amount which you will be expected to put towards each and every claim which you make.  The terms and amounts of the excess can vary dramatically between insurers and will often be adapted to your area and your surroundings, for example if your property were more at risk of flooding than the average home (very relevant after recent events in the UK), the insurance company may impose a very heavy excess on this to reduce their exposure. 

Historically subsidence claims have incurred the largest excess terms, being in the region of £1,000, but in years to come it may be flooding claims which may be more relevant for many.

However unlikely, you should also be aware that many building policies will not pay out on events such as damage in a war, or some kind of radioactive contamination (probably highly relevant to those living near nuclear power stations).  These two exclusions are not exclusive and each insurer may introduce additional terms to their policies.

Why do the insurance companies have excess charges?

Basically the excess terms are the insurance companies way of reducing their exposure as well as reducing the number of borderline claims, i.e. if there was no excess then many home owners would claim for the smallest problem, but if there is an excess they are likely to only claim for larger, more serious issues.

The cost of rebuilding your property

This is the main reason why building insurance is mandatory, i.e. the cost of rebuilding your property in the event of a major incident which has effectively reduced the value substantially.  However, there are varying terms which the insurers use and you need to be aware of the following :-

Cost to rebuild. 

 

While many would expect the policy to cover the value of your home, in many cases this is not the situation.  Effectively your policy will insure the cost to rebuild your home, which can be different from the value of your home - and has the potential to cause arguments with your insurer.

 

Unlimited cover. 

While the most expensive insurance cover of them all, this can be invaluable in the event of a major incident. There would be no upper limit (within reason) to the costs associated with rebuilding your home, thereby taking much of the pressure off the home owner.

The insurance market has become ever more competitive, especially after the growth in internet use which has allowed many to compare and contrast different offers in an instant.  Each quote from an individual insurer will differ, some more than others, and it is essential that you take all of the above elements into consideration and arrange the best offer for you.