Bateman Group - Underinsurance Warrantees

... and Things That Go Bump in the Night

Article by The Bateman Group

The majority of clients’ insurance is based on a matter of Trust, Trust in your advisers to understand your requirements, Trust that your Insurer will meet a claim. How can you be expected to understand a complicated subject like this, when your expertise is letting property? Or perhaps insurance looks pretty straightforward, you pay your premium and your claim is paid when you have a disaster. Big mistake!

Do you know the difference between a Warranty and a Recommendation. What has an Average Clause got to do with the sum insured. “Only a bit of the building is damaged isn’t it”, Ah! But you didn’t tell us which bit was going to burn down! MR CLIENT!

The basic presumption by an insurer is that they have been given all the facts and they have received the correct premium for the risk. An important part of that assessment is the sum insured and it is expected this should be on a full replacement cost, otherwise the Average Clause can apply in the event of loss.

The word Average comes historically from Marine Insurance, from the days of the Lombards, but essentially means that in the event of a loss your claim can be scaled down in proportion to the level of under insurance and this is now applied more vigorously by Insurers than in earlier years. It is easy to confuse the building replacement costs with market values. In the South West particularly, many properties are built to Victorian standards and frequently of stone. The replacement costs are substantially more than modem construction and frequently more than market value. Furthermore your policy will cover the cost of Debris Removal and Architects Fees concerned with re-building and the sum insured should be increased by 15% to include these, if the property is Grade Listed additional restrictions can increase building costs and must be taken into account.

So what’s this thing about Warranties. These are important endorsements required by an Underwriter to make the risk acceptable at the premium quoted. They may relate to theft protections, precautions to be taken to minimise loss, such as fire extinguishers, or installation of safety measures, such as fire escapes. These must be treated with the utmost respect. If on inspection after a claim they are found to be missing or not in use, the Insurer can reject a claim, even if their operation is completely irrelevant to the actual damage. Naturally in that instance your adviser will try to negotiate a practical solution but the impact of a warranty must never be under estimated.

A Recommendation, usually for risk improvement, is optional and while we would always suggest implementation, would have no detrimental affect on payment of a claim.

On a slightly different point, do look at your cover for loss of rent in the event of the loss making the property uninhabitable. Your rental agreement will usually release the tenant from paying rent for the duration of the repairs, but if this takes months, will you be without a tenant for some time after repairs are completed? We have seen situations when planning permission has delayed re-building or nearby buildings involved in the same fire were dangerous and have taken longer to reinstate and have prevented re-occupancy, therefore examine a worst case possibility, i.e. could a disaster leave you without rent for as long as say 3 years, very important if you are still financing the purchase of a property.

The matters above cause problems in many claims. Provided you are dealing with experienced advisers who are prepared to take the time to fully discuss your requirements, these pitfalls can usually be avoided.

If all else fails ask for advice. Most insurance men love talking about insurance.

John Bateman ACII.,FCIB.,CIP.,IRIB

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