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Underinsurance
Warranties
&
Things That Go Bump in the Night
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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