Do you really need disaster mortgage insurance?

Insurance Helpline with Cedric Stephens

Question:

I saw where an insurance company recently launched what they called disaster mortgage insurance (DMI). What is this? My mortgage agreement requires me to buy peril insurance as one of the conditions of getting a loan. That insurance mainly protects the lender. Is this type of coverage absolutely necessary?

- BS, Kingston 7

Answer:

Planning Institute of Jamaica head, Dr Gladstone Hutchinson, recently argued that disaster risk management is of central importance to "macroeconomic planning" or, to use words that ordinary folks like you and me understand, the country's national plans.

Post-impact assessments by themselves, he implied, were a waste of time. Planning for disasters should start before they occurred, not after. As the adage goes, failure to plan is planning to fail.

Wise individuals and families plan for disasters like hurricanes or earthquakes before they happen. They do not operate on the principle that Government will provide a bailout.

Disaster mortgage insurance (DMI) should be viewed in the context of planning for disasters at the household level. Household insurance policies offer one form of protection. They insure buildings and contents against physical loss or damage as well as provide funds for alternative accommodation in the event of damage.

However, if a house suffers damage which made it uninhabitable, that contract would not provide any funds to pay the monthly mortgage. DMI offers financial protection in the event of a disaster by making mortgage payments for a fixed period after the house becomes unliveable. Household policies and DMI work hand-in-hand.

There is one big catch with DMI: it is only being offered to a small group of householders.

To qualify, you must be a household insurance customer of the company that launched the product. If you bought household insurance with another insurer, you could always decide to make a switch if DMI makes sense to you and your family.

The company promises to pay when "a covered loss renders the primary residence temporarily uninhabitable for a period exceeding 48 hours following the event ... a sum equivalent to the monthly mortgage payment or the limit selected per month ... the monthly payments (will be made) for up to a maximum of ... months ... or until the primary residence is made habitable again by repair, restoration or reconstruction".

DMI will also pay the deductible on the primary household policy up to a pre-determined limit when claims for a "covered loss" are paid. Since earthquake, hurricane, and flood claims under household policies are subject to a compulsory excess of two per cent of the sum insured, this could be a useful benefit. Only two deductible reimbursements are allowed during the 12-month policy period.

Here is a list of some of the main things that DMI excludes:

An event affecting or causing allergies and/or resulting from fungi.

Constant or intermittent noise;

Pollution, contamination, and/or waste.

Normal wear and tear and/or deterioration.

Settling, shrinking, bulging or expansion, including resulting cracking of pavements, patios, foundations, walls, floors, roofs or ceilings, and/or subsidence.

Neglect which means the insured's failure to take all reasonable steps to protect the property when it is threatened with loss or damage, and to take all reasonable steps to protect the property from further loss after loss or damage occurs;

Theft or vandalism;

Faulty, inadequate or defective planning, zoning, development, surveying, siting, design, specifications, workmanship, repair, construction, renovation, remodelling, grading, compaction.

Materials used in repair, construction, renovation or remodelling or maintenance of any part or all of any property on the insured premises;

Interruption of power from an off-premises source;

The seizure or destruction of covered property by any governmental body, including any customs or guarantee action; or confiscation or destruction of property by an order of any governmental or public authority, except an order to destroy property to prevent the spread of fire or explosion.

How affordable is DMI? This is a very important question, especially in these hard times and where many consumers are struggling to find money to make their monthly mortgage payments.

DMI is, in my opinion, a welcome addition to the suite of insurance products that are available to help local consumers plan for disasters.

There are, however, a few things about it that I dislike. The first is that the product will be sold to a very limited market. I am also very disturbed that the maximum benefit period appears to be limited to six months. When it is considered that some damage claims for motor vehicles extend over 180 days, the six-month limit for mortgage protection seems very stingy.

Cedric E. Stephens provides independent information and free advice about the management of risks and insurance. aegis@cwjamaica.com SMS/text message to 812-7233.