Hi Folks, good day to all. I am in the midst of renewing my home insurance when I discovered that many of my colleagues and friends do not even buy any home insurance. The common reason given was that while taking out the mortgage from the bank, the banker have already stipulated that the home owner will need to pay for the mandatory fire insurance. This thus give rise to a belief that there is already a home insurance coverage for major fire and the resultant damages.
1. The Misconception-The Bankers Purchased For You liao
Unfortunately, this is the greatest myth and misconception along 2 lines.
Firstly, the mandatory fire insurance purchased will only cover for the structure of the building as well as any other original fittings and fixtures given by the developer. It does NOT cover the internal renovation as well as purchase of new TVs, ceiling fans, sofa, dining table set, refrigerator, bed-frames & mattresses etc.
Secondly and this is the most important and slightly complicated part. This fire insurance purchased by the Banker is actually structured for the insurer to pay off the loan owed by you in the event of a disastrous fire. Let me elaborate further below and imagine you have a outstanding mortgage loan of S$500K.
2. The mandatory fire policy that a bank forces a buyer to take out has very explicit legal terms. It acts as a hybrid: it is legally structured as a "property reinstatement policy", but it operates practically as a "loan-repayment mechanism" for the bank.
Here are the exact terms and mechanisms of how a standard bank-mandated Mortgagee Interest Policy (MIP) works:
(i) The Core Insurance Terms
The banker usually sets the maximum coverage limit to match either the outstanding loan amount or the building's reinstatement value (whichever is lower). It completely ignores the market value of the property or the value of your possessions.
(ii) The Loss Payee Clause (Mortgagee Clause)
The most critical term in the policy states that the Banker is the sole "Beneficiary (Loss Payee)". Legally, the contract dictates that in the event of a major loss, the insurance company cannot pay you directly. They must pay the bank.
3. Does it fix the fire damage or just pay off the bank?
It actually "does both", but the priority is entirely skewed toward clearing the bank's debt. Here is the exact chain reaction after a devastating fire:
Step A: The Insurer Pays the Bank (Paying off the loan)
Because the building (the bank's collateral) is destroyed, the insurance company assesses the damage. If the property is completely uninhabitable or ruined, the insurer pays a lump sum directly to the bank to completely or partially wipe out your outstanding mortgage balance. The bank is made whole and walks away happy. Your debt to the bank disappears.
Step B: The Reinstatement Right (Fixing the fire damage)
Technically, because it is a property policy, the insurance funds can be used for reinstatement. However, because the bank is the primary "owner" of the policy benefits, the choice is entirely up to them.
(4) The Ultimate Catch: The Law Behind It
Under Singapore's Building Maintenance and Strata Management Act (BMSMA) and general insurance laws, if the insurer pays off your loan to the bank, a legal transition happens, that is, the insurer takes over as the mortgagee.
This means the insurance company effectively "buys" your debt from the bank via re-assignment. The bank leaves the picture, and you must now continue to make your monthly mortgage payments directly to the insurance company instead.
Summary
In other words, the fire insurance purchased in favour of the bank as beneficiary is not a real fire policy-it serves merely to transmit the risk of default in monthly repayment by the mortgagor and assign them to the insurer. In the event of major fire damages, you will not have control over the funds from this particular fire policy for reinstatement of the building structure, original developer given fixtures and also fittings. In addition, as mentioned earlier, there is another major financial exposure that can range from S$20k to S$100K for the renovation and house contents that were destroyed and also temporary housing costs. Since this post is getting too lengthy, I will stop here and break further discussion, in another blog post (Part 2), on where the actual funds for reconstruction is coming from and whether one need to buy your own fire insurance.
