The death toll in the building tragedy that occurred in Chennai recently is yet to sink in. But once the the dust settles down, approximately 65 home buyers will be left wringing their hands in despair as they wonder whether their dream home will ever become a reality. The truth is that none of standard insurance policies, whether your home insurance cover or the householders policy, cover under-construction buildings.

On the hook In such situations, home buyers who take a bank loan are liable to pay back the amount even if they do not take possession of the property.

“The borrower cannot say that he will not repay the loan because there are issues in the property,” says Shyam Sundar, an advocate. Banks will follow due procedure in considering the borrower as a defaulter, if payment is not made for three months. Nor will you find it easy to take other loans until the issue is resolved. The borrower can’t seek refuge in a home loan insurance policy either. This protection only pays the outstanding loan amount in case of a borrower’s death, and does not cover under-construction property. The risk is higher if you had opted for schemes such as 80:20 where the entire loan amount is disbursed to the builder by the bank. Though it will not cover contingencies such as faulty construction or negligence, buyers can, however, take a fire insurance policy to protect against other kinds of damage, says V Padmanabhan, a general insurance official. These policies come in two variants − one where the sum assured is based on the completion and the other where the sum is updated as construction progresses.

But this kind of cover is still limited while your building is under construction. A more comprehensive cover only kicks in after you take possession, says Sanjay Datta, Chief - Underwriting and Claims, ICICI Lombard GIC.

Check builder’s coverage While home buyers have limited recourse, builders or contractors have the option of availing Contractor All Risk Insurance (CAR) on their projects through the construction phase. Therefore, it may be good for you, as a home buyer to ask your builder if he has such a cover.

The cover provided by such policies includes damage due to an act of God, strikes, riots and other accidental damages. Losses due to faulty design and bad material are excluded, but add-on covers are available to mitigate the risk from such shortcomings. Earthquake and terrorism can also be covered by paying additional premium.

Besides this policy for contractors, the developer can purchase Erection All Risk Insurance. “The onus is on the developer to insure the property while it is under construction, so that in an eventuality, the home purchaser is not at a loss,” says Anil Sachidanand, Managing Director & CEO, Aspire Home Finance. The cover can help the builder secure the funds necessary to restart the project and your loss as a flat purchaser may be limited to delays.

There may be one more benefit when you insist on the builder taking this policy. Insurance companies conduct a thorough inspection before they insure a building. “We check for previous incidents in that location, construction methods, risk exposures and typical risk performance,” says TA Ramalingam, Chief Technical Officer – Non-Motor, Bajaj Allianz General Insurance.

Still, the best way to de-risk your home purchase is by making no compromises on the builder’s credentials. Rating agency CRISIL’s Real Estate Star Rating (CREST) does this on your behalf. They evaluate the risk of project delivery and consider a developer’s track record as an important criterion. They also vet the quality control practices followed by the builder. So, you must enquire and assure yourself that the project is handled by a high quality management team, has proven construction expertise and follows a strict evaluation process in contractor and vendor selection. This, in addition to legal due diligence on the title and contract, will help protect your investment.

Related Topics
comment COMMENT NOW