Mortgagees Overinsuring for Fire Insurance of Mortgaged Properties

Banks are exploiting mortgagors by taking out fire insurance on the mortgaged properties to cover the full amount of the loan which in almost all cases will be about 90% of the market value of the properties.

Market value is the combination of the cost of the land and of the building on it. Fire insurance does not cover land, but only the cost of re-building the building(s) on it.

In a worst case scenario, a building badly damaged by fire or any other calamity covered by the insurance, may have to be pulled down completely and rebuilt. The insurance is meant to cover all the costs of doing this, i.e. pulling down the damaged structure, clearing the debris, architects and engineers fees and cost of re-constructing the building. This will not come up to 90% of the market value of the property.

When mortgagees purchase fire insurance on the market value, they are exploiting consumers and unfairly enriching themselves. This is because the insurance premiums are considered “loans” and charged to the customers’ accounts and interest is charged on every cent outstanding. Thus banks earn more in interest than they would if the insurance does not cover the cost of the land as well.

Where the banks have sister insurance companies, the fire insurance is bought from these sister companies. Thus both the mortgagees and their sister companies end-up unfairly enriching themselves — the banks by earning more interest and the insurance companies by the higher premises for coverage of land as well but on which no payment will be made. This does not seem to be wrong to them. They do not consider this illegal enrichment.

But when a claim arises, the insurance company will never pay the full insured sum if it is more than the cost of rebuilding the property. Any property owner claiming the full insured sum (if it is more than the cost of re-building) will be curtly told fire insurance is not for enrichment purposes.

Bank Negara Malaysia must stamp out this unfair business practice by banks and insurance companies. Since payment for any claims is strictly based on the actual sum required for restitution/rebuilding, the practice of mortgages buying insurance including any part of the cost of land must be stopped.

Letter to the press, 27 August 2014