Cash settlement after disaster: The pitfalls

As a result of the 2010-2012 Christchurch New Zealand earthquakes, more and more Canterbury policyholders are paying their earthquake claims. Insurers began aggressively pursuing cash settlement in 2014 in an effort to settle as many claims as possible. As a consequence of the insurance companies’ slowness to settle property claims, the frustrated, stressed and impatient policyholders risk accepting cash settlements without regard to the escalation allowance between the time of acceptance of the settlement offer and the time when the construction contract is accurately assessed and priced. Invisible damage and costly foundations are added, combined with potential hyperinflation in materials and labor (demand shocks) as the recovery phase of the earthquake accelerates. This is a very worrying development and any homeowner who wants to settle for cash should think seriously before entering into such an agreement. At least independent legal or technical advice should be sought. At least make sure you understand the difference between the full reinstatement costs (actual costs associated with building a similar home) versus replacement value (the property’s market value in undamaged condition). For you homeowners, there is a great risk of unfunded cost overruns as repairs or rebuilds scoped to a “notional” claim position rather than to the actual cost of repair or rebuild. Insurers and their project management companies provide “best guess” quotas for foundations, especially on damaged soil, and cost overruns can be tens of thousands of dollars out.

A cash settlement represents the “actual cash value” of the loss, which is the lower value of used property compared to new e.g. Ten-year-old bathroom cabinets are worth less than new kitchen cabinets, so their actual cash value is less than the cost of new cabinets. Homeowners, to be fully protected, have usually purchased full replacement policies in many cases, designed to pay the full cost of replacement, even if the cost has greater value than the actual value of the item. cost policy, the homeowner is entitled to new bathroom cabinets instead of the difference between the actual cash value of the old cabinets and the price of new ones.

Cash settlement is the situation where your private insurance company pays you a sum of money when settling your insurance claim. You then make the decision to spend the money by either engaging contractors yourself to repair or rebuild your home, subject to any restrictions set by the terms of the private insurance company or lender’s terms. If there is a mortgage on the property, approval from the mortgagee is required.

Also, note that if you choose to settle for cash, the insurance policy in your current house will be reviewed and may be canceled as part of the final settlement. The settlement amount is the cost of re-installing your home minus any insurance surplus still owed.

The major difference between the two is this: in a replacement policy, a house replacement value is determined by the cost of construction – in a cash settlement policy, a house value is determined by the property market.

Insurers know from experience that many homeowners are naïve or unaware of the claims process and are likely to accept the first offer made to them. Often, the homeowner is led to believe that they can get the necessary work done for less than the insurance company offers. It is not unheard of for adjusters to suggest that the homeowner does the work himself and pockets the difference. Keep in mind that the only cost valid for repair and reinsurance insurance is the price that the specialists who will be performing the work agree to work for !!

Insurers often pay former contractors / quantity surveyors to provide estimates when it is so obvious that contractors would never be able to do the job for the stated amounts. Their purpose is simply to give the insurance company third party “credibility” by providing a number that the insurer / adjuster can use to negotiate with the homeowner. Therefore, it is critical that homeowners have written bids / offers from respected contractors who will perform the work for these amounts. Do not accept estimates. They are simply ‘guess’. For example, painting is almost always included in insurance losses, and more often than not adjusters use a flat rate per month. Square meters. Consider the following scenario. A bird has fallen on your earthquake damaged chimney and covered itself in soot, coating several of your high specifications painted walls and ceilings with soot. The space is then measured by adjustment and the square meter is calculated. He allows say $ 340.00 and tells you that this is what the insurance company offers. But what he doesn’t tell you is that in his calculation he has not calculated a pile of other objects. Painting rarely involves simply applying paint to the wall. What about the quality of the paint, the condition of the walls, the preparation of paints, hooks and hooks, the removal of furniture, switches, light fixtures, shelves, doors, windows, moldings, wall hangings, removal / replacement of curtains and the list goes on. Any of these items will seriously alter the cost of painting this space. If all of these items were included in the quote as they should have been, the sum would look significantly different from the one the adjuster cites. Still, when you go to repair your home, the homeowner must pay the latter amount. None of these elements can be determined over the phone or calculated using a specific amount per Square meters. The insurer’s ‘computer program estimation’ also does not allow them.

In order to ascertain a real price, the painter must come and inspect the work involved, determine what is required (to satisfy you) and then present a detailed offer that you can accept. The same will be necessary for all other areas of the home that require work.

The calculation of the sum depends on the insurance. For this reason, legal advice is recommended. More likely than not, the amount offered will only be the insurance company’s ‘estimate’ of what it will cost to repair or rebuild (if a total financial loss) your property. The ideal situation is to have your own independent assessment, assessment or assessment of the property. The insurance company does not have the sole right to inform you of what you are entitled to. Insurers will try to use “fictitious” repairs to justify smaller payments. In fact, there are those experts who would say that if there is structural damage, never take a cash offer. Neither you nor the insurance company can be sure of all the necessary damage and building renovation. If their cash offers lack a realistic repair or replacement, the difference is YOUR loss and insurers deserve, and that’s not why you bought your policy.

If you settle for cash, you will encounter the following challenges:

Benefits of cash settlement:

  • you want full control of your repair or rebuild, which can speed up the process, but it will also mean – you will have to project yourself, you will need to organize your own contract work insurance and you will bear the risk of cost overruns and technical and other project risks. If the insurer chooses the contractor, you have the insurer to fall back if the contractor does not complete the job or does not provide quality work.

  • you may find it easier to incorporate non-earthquake repairs or renovations

Problems related to cash settlement:

  • You will have to project yourself. You have to organize your own work insurance and you carry the risk of cost overruns and technical and other project risks. You may have to pay for professional project management;

  • Your insurance company may only be prepared to pay you for ‘similar things’ rather than for ‘like new’ repair or rebuilding, which will mean you can’t replace what you had in today’s money as costs have increased;

  • If additional earthquake damage is detected during your repair, you will have to resume discussions with your insurance company – it is for this reason that homeowners do not have to sign full and final agreements with their insurance company;

  • You are responsible for any defects in the situation where your repair or rebuilding costs are more than your cash settlement due to demand arising and rising construction costs;

  • If you decide not to repair or rebuild, your insurance coverage may very well be compromised, and future sale of the property may also be compromised;

  • Don’t assume that the amount the insurance company gives you is sufficient – e.g. unidentified damage will not be taken into account. In the event of replacement or total loss, a low valuation provided by a valuer that the insurer can keep does not reflect the true value of the property. Also, be aware of overly optimistic estimates from builders and repair companies that do not have the current intention to do the work themselves;

  • In the Christchurch scenario, two of the biggest invisible risks of cash settlement are settlement of the building in relation to the Christchurch City Council flood levels and lateral movement of the building in relation to the legal limits. To determine both of these on the basis of an insurance right, it requires a detailed examination of the assessment to determine how much the building has been raised and how much the building has moved in relation to the legal boundaries;

  • Without knowing both about this, owners who have settled cash find to their dismay that their house is now considered flood-prone and uninsurable, and in some cases their house is also now above the legal limit and enters the neighbors property. No cash settlement amount for cosmetic (or even structural) repairs will provide the means to get the entire building lifted back into height and moved back to the proper position as required by the legal court under full liability insurance.

  • It is prudent for the homeowner to obtain independent assessments from all the experts required before considering making a cash settlement. Unless, of course, the insurance company takes the risk, and the cash settlement is for a complete rebuild of the house for insurance law. This would then remove any risk transfer back to the owner.

It is important that you receive full reinstatement costs so offers are ready to prove the costs involved.

Discuss your cash settlement with your mortgage lender and legal advisor. Check your policy carefully to make sure you haven’t missed anything – housing benefit, storage costs, stress benefits, death benefits, etc. One thing you can count on is that the insurer is unlikely to point out what your full rights are if you do not claim them.