Fire insurance is mandatory for homes mortgaged to banks, and optional for others

Insurance and banking experts said that insurance for homes mortgaged to banks is mandatory from a contractual and regulatory standpoint, pointing out that banks are the first beneficiary in fire insurance contracts for financed properties, while the property owner comes in second place.

They explained to “Emirates Today” that in the event of a fire, and the property is financed and mortgaged to the bank, the compensation is disbursed by the insurance company directly to the bank, which in turn decides whether the amount is directed to repairs if the losses are minor, or is used to pay part of the debt, pointing out that insurance for homes and private homes is optional as long as there is no real estate financing on them, as it is left to the “discretion” of the owner.

They stressed that the insurance accompanying real estate financing is mandatory, and the transaction cannot be completed without it, and it continues annually until the end of the loan repayment, while its percentage ranges between 0.0025% and 0.003% per year of the value of the financed property, meaning that every million dirhams of the price of the property requires the payment of insurance ranging between 250 dirhams and 300 dirhams annually, pointing out that the presence of cases of intentional or negligence that led to the fire waives the right to receive compensation from Before the insurance company, regardless of the size of the loss.

Mortgaged homes

In detail, the expert and insurance consultant, Bassam Galimran, said: “There is no federal legal text that obliges all homeowners to insure their properties in general, but insuring homes mortgaged to banks is mandatory from a contractual and regulatory standpoint, as banks and financial institutions require the existence of a valid insurance policy on the mortgaged property throughout the duration of the real estate financing, in order to protect their financial interest.”

He added to “Emirates Today”: “This requirement is based on the real estate loan system issued by the Central Bank of the Emirates under Regulation No. 58 of 2011, and in particular Article (2) regarding the (risk management) requirements, which obliges banks to adopt effective policies and procedures to manage risks, protect collateral, and maintain their value throughout the duration of the loan. Within this supervisory framework, the requirement to insure the mortgaged property against risks such as fire, and the risks associated with it, is a legitimate banking practice. It is compatible with regulatory instructions, and is usually included as a binding condition in the financing and mortgage contract.

Galimran added: “When a loss occurs resulting from an insured accident, the claim is submitted in the name of the insured (the property owner), while the bank is the primary beneficiary of the compensation according to what is stipulated in the insurance policy, and the compensation is usually used to repair or rebuild the property, or to reduce the balance of the existing loan.”

Galimran continued: “As for unmortgaged homes, there is no legal obligation to insure them, and the matter is left to the discretion of the owner, emphasizing that insurance remains a recommended preventive practice to protect assets from potential risks.”

In response to a question related to real estate financing granted by government agencies, and whether they are covered by insurance, Galimran said: “Insurance for real estate financing granted by funds and government agencies is subject to the conditions set by these agencies when approving the granting of financing. They are the ones who decide whether there must be insurance, or whether it is not mandatory and leaves it as an option for the citizen, since these agencies are the ones concerned with this matter.”

Two types of insurance

For his part, real estate financing expert, Ahmed Arafat, told Emirates Today: “There are two types of insurance that accompany real estate financing. The first is (life insurance), which is paid monthly with the installment. In the event of the death of the borrower, the debt is dropped. The second type is real estate insurance, which is paid once a year and continues until the full financing amount is paid.”

He added: “Usually banks have insurance companies that complete the insurance policy, and the policy amount is added to the financing value, and is paid as a percentage of the value of the monthly installment, part of which goes to profits, part to the principal, and part to insurance.”

Arafat continued: “Real estate insurance concerns fires and (electricity short-circuits), and does not oblige insurance companies for natural disasters. It is between 0.0025% and 0.0030%, meaning that every million dirhams of the property price requires paying between 250 dirhams and 300 dirhams once a year, and sometimes customers are not obligated to pay the insurance value for the first year, as a type of offer, while other banks completely exempt the customer from it and pay it on his behalf.”

The first beneficiary

In the same context, banker Mustafa Al-Rifai said: “The insurance accompanying real estate financing is mandatory, and the transaction cannot be completed without it, and it continues annually until the end of the loan repayment.”

He added: “When there is a mortgage, the property is considered a guarantee for the bank, and the latter has a legal right over it until the loan is paid in full. Therefore, the insurance policy is often in the interest of the bank, which is the first beneficiary, meaning that if a fire occurs, the damage affects the guarantee that the bank relies on to recover its money. If the property becomes severely damaged, uninhabitable, or its market value decreases significantly, the value of the guarantee decreases. Therefore, the bank has the right to receive compensation first, and then determine how to use it, whether by repairing the property or paying part of the debt.”

Al-Rifai continued: “In most cases within the Emirates, banks do not rush to repay the loan if repair is possible, but rather aim to return the property to its previous condition before the fire, and do not use (compensation) to repay the loan except in the event of large total losses.”

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An essential part of the property purchasing process

Banker Tamer Abu Bakr said: “Mortgage insurance in the UAE is an essential part of the process of purchasing real estate through bank financing, and its importance lies in the fact that it is a protection for the borrower and his family, as well as a protection for the financing bank. When obtaining a real estate loan from a bank, a specific type of insurance is usually required to protect the bank and the borrower alike, and it aims to cover the risks associated with the inability to repay the loan.”

Abu Bakr added: “This is often in the form of life insurance linked to the loan, and insurance on the property itself against a number of risks, most notably fire insurance, but compensation cannot be disbursed or referred to the insurance company in the event of intentional or negligence on the part of the owner of the mortgaged property.”

He continued: “The bank is usually the first beneficiary of compensation in mortgage contracts. For example, if a fire occurs and causes reasonable damage, the compensation is directed to repairing the damage, but if the loss is serious, the compensation value is deducted from the remaining loan balance.”

. Requiring insurance on the mortgaged property against risks such as fire and the risks associated with it is a legitimate banking practice.

. Real estate financing insurance granted by funds and government agencies is subject to the conditions set by those agencies.